Microsoft Shares Sink After Weak Forecast
![microsoft](https://www.silicon.co.uk/wp-content/uploads/2016/08/Microsoft.jpg)
Enterprise software giant Microsoft beat Wall Street expectations, but shares fell as it issued weak guidance for the coming quarter
Microsoft is one of the first tech giants to provide investors and Wall Street with a glimpse of the slowing economy and potential trouble ahead.
The software giant posted its first quarter results that showed a drop in profits, its slowest Q1 revenue growth in five years – and it alarmed Wall Street with its weak forecast for the second quarter.
Shares therefore fell 7 percent in extended trading on Tuesday, despite the fact that Microsoft’s results had actually beaten analyst expectations.
Financial performance
It is worth noting that excluding that 7 percent fall, Microsoft shares have fallen about 26 percent so far this year, while the S&P 500 stock index is down 19 percent over the same period reflecting the increasingly bear-like market.
Digging into the results, for the first quarter ending 30 September, Microsoft posted a net profit down 14 percent at $17.556bn, compared to a profit of $20.5bn in the same year-ago quarter.
Revenues meanwhile rose 11 percent to $50.1bn from $45.3bn a year earlier.
Analysts according to Refinitiv had expected revenues of $49.6bn.
“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” said Satya Nadella, chairman and CEO. “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”
There was a mixed picture when Microsoft’s divisional performance was examined.
Microsoft’s Intelligent Cloud business segment, which includes the Azure public cloud, as well as Windows Server, and Enterprise Services, generated $20.33 billion in quarterly revenue, a rise of 20 percent. Despite this, it slightly missed analyst expectations.
Azure revenue grew 35 percent in the quarter, Microsoft said, compared with 40 percent growth in the previous quarter. Analysts had expected above 36 percent growth.
Switching over to Redmond’s Productivity and Business Processes division that contains Microsoft 365 productivity software subscriptions, as well as LinkedIn etc, posted $16.47 billion in revenue, which was up 9 percent and above the $16.13 billion expectation.
PC struggles
Over at Microsoft’s More Personal Computing unit (Windows, Xbox, Surface, Bing advertising etc) revenue totalled $13.33 billion, down slightly and higher than the $13.12 billion expectation.
Lastly quarterly revenue from actual sales of Windows licenses to device makers dropped 15 percent year over year, steeper than any quarter since 2015 and worse than the outlook Redmond had predicted in July.
This is hardly surprising.
Earlier this month data from analyst house IDC showed a 15 percent decline in PC shipments from July to September – continuing the 15 percent decline witnessed during the second quarter.
Microsoft admitted that the PC market continued to deteriorate during the quarter.
Looking ahead
Lastly, Microsoft added to investor fears about the state of the global economy after it provided a weak forecast for its second quarter.
Microsoft forecast Q2 revenues of between $52.35bn to $53.35bn, implying growth of 2 percent, but analysts had forecast Q2 revenues of $56bn.
And Microsoft also warned that Azure growth may fall to roughly 37 percent, but analysts had expected 39.4 percent Azure growth.
Belt tightening
Microsoft is already taking steps to reduce costs.
Last week it confirmed a second round of job cuts, thought to be under 1,000 staff.
Redmond had already undertaken a round of layoffs affecting less than 1 percent of employees in early July.
Then later in July it was reported that Microsoft had eliminated many open jobs, including in its Azure cloud business and its security software unit, as the economy continued to weaken.
It came after a senior Microsoft executive in May this year had warned the management of the Windows and Office divisions to adopt a more conservative approach to hiring new people.