Microsoft Misses Estimates, Stock Up 5% on Rosy Guidance

While Microsoft missed earnings estimates, its stock price is up 5% after the company issued rosy guidance. The company said that currency fluctuations would cut sales by 4% for the year and about 5% for the current quarter. The company also said that its subscription software model is paying off, with revenue from Azure and other cloud services rising 40 percent and home and entertainment increasing 8 percent year over year.

Currency fluctuations will cut sales by about 4% for the year and about 5% in the current quarter

Microsoft missed estimates in Q4, but the stock is still up 5% after the company announced rosy guidance. Amy Hood, the company’s finance chief, told analysts the company plans to increase the useful life of its server and networking gear. She noted that the company has already made a similar move in 2020. “We’re making progress and our momentum is good,” Hood said.

Microsoft missed analysts’ estimates in the fourth quarter, citing unfavorable foreign exchange rates and weak PC sales. However, Microsoft’s guidance and recent guidance boosted the stock’s late-afternoon gains. The Redmond, Washington-based company reported earnings of $2.21 a share, versus the $1.22 analysts surveyed by FactSet. Its sales increased 16% year-over-year and grew by 3% in constant currency.

The company expects to report third-quarter sales between $7.9 billion and $8 billion, compared with $7.8 billion previously. Microsoft expects to generate revenue between $34.2 billion and $34.9 billion this year, above analysts’ consensus estimate of $33.5 billion. Microsoft’s guidance was also welcomed by investors because it showed that its core franchises were still performing well. The company also saw $126 million in working bills from Russia after it stopped promoting its services in the country following its invasion of Ukraine. Microsoft introduced services to help its customers with safety incidents.

Microsoft’s revenue and earnings were below expectations, but analysts and bloggers were still enthusiastic about the company’s future growth trajectory. The company’s Intelligent Cloud segment is expected to drive about $20.3 billion in revenue in the first quarter, while the rest of its business will miss estimates by around a third. The company still scored nine in TipRanks’ Smart Score Rating System.

The company’s commercial cloud business, which includes Azure, generated 42% of revenues in Q4, which missed analysts’ expectations by a margin of 5.2. Revenue in the Intelligent Cloud division grew by 20%. Despite the disappointment in revenue, the company’s stock is up 5% on the back of its rosy guidance. Its stock has gained more than 20% this year.

Microsoft’s subscription software model is paying off

The move to a subscription software model isn’t necessarily inevitable. After all, Microsoft and Adobe both shifted away from the costly one-time purchase of Creative Suite to a subscription service in 2013. This model has proven a profitable one for both companies. According to Microsoft’s financial reports, subscriptions of Microsoft 365 Consumer increased by almost 10 million in the past year, and Office 365 commercial seats are up 17% year-over-year.

Despite the frustration, Microsoft is seeing steady growth. Revenue from Office 365 has increased by 72% and now has 18.2 million consumer subscribers. For legacy businesses, the subscription model will provide an important competitive advantage. For example, Gillette marketed razors at low prices and then charged steeply for extra blades. This model worked well for the company for 100 years, but subscriptions have largely replaced it.

The subscription model also increases user control and customization. With the traditional license purchase model, IT administrators must go through a complex process to manage account controls and assign user permissions. With the subscription model, administrators can set a minimum purchase level and upgrade later if necessary. Customization is also easier per user, over time, and around other needs. Microsoft’s subscription software model is paying off, and it will only continue to grow.

In the business software market, Office 365 has been a leader for years. It has both cloud-based and on-server versions, and it’s the most popular software in the market. It also offers volume license deals and flexibility in licensing levels. It’s easy to see why Office 365 is a popular subscription model among businesses. And despite its popularity, the subscription model has helped Microsoft regain market share from Google.

While Microsoft’s subscription software model has a shaky foundation, the company has been reaping the rewards. Microsoft has been able to streamline its business by converting its installed base to a single version. With fewer versions, Microsoft is able to lower engineering costs while improving platform reliability. Large enterprises have already been paying for Windows subscriptions with Software Assurance, a volume licensing program that gives users access to enterprise features and usage rights.

Microsoft’s home and entertainment business grew by 8 percent year-over-year

The results were mixed for Microsoft’s home and entertainment division. Revenue declined 22 percent from the same period last year to $453 million in the just-ended quarter. Xbox sales rose 30 percent year-over-year, and Microsoft continued to see revenue growth in its video game consoles. Xbox content and services revenue rose 10 percent, helped by first-party sales and subscriptions to Game Pass.

Xbox sales were strong for the company, boosted by Halo 3, which sold over eight million units in the third quarter. Microsoft also saw a big jump in revenue for the Xbox 360. Xbox sales were the highest of any quarter for the company. Xbox 360 revenue increased by 51 percent year-over-year, while revenue for content and services rose 40 percent. The Xbox is the second-most popular video game console, behind Sony PlayStation and Nintendo Wii.

Other key segments were Xbox and games, with revenue up 43% across the Americas and 43 percent in Europe. Asia-Pacific revenue grew by 7 percent year-over-year. Microsoft’s Surface sales, which comprise about one-third of the company’s revenue, also boosted Microsoft’s revenue in the fourth quarter. Microsoft is continuing to invest heavily in the cloud to deliver an optimal experience for consumers.

Overall, Microsoft’s home and entertainment division grew by 8 percent year-over-day in Q’16, and analysts are forecasting an even higher percentage for the entire fiscal year. Microsoft’s home and entertainment division is expected to see a small revenue decline in Q’1 FY’23 and a double-digit growth rate in fiscal year ’19. Further, Microsoft plans to roll out new development tools to help developers build apps and games.

As a result, Microsoft raised its revenue and earnings guidance for the full fiscal year. Wall Street analysts expect Microsoft to earn $1.73 per share on $57.3 billion in fiscal 2008.

Revenue from Azure and other cloud services grew by 40% compared with 46% in the prior quarter

Microsoft Corp. on Tuesday reported its fourth-quarter results, and the company missed its own forecast for revenue growth and profit by about one point. Revenue for the quarter was $51.9 billion, up from $45.6 billion in the prior quarter. Revenue from Azure and other cloud services increased by 40%, missing analysts’ expectations by one point. Microsoft’s revenue growth accelerated in analytics, teams, data and security, and it also saw a 25 percent increase in commercial bookings.

Microsoft’s guidance takes into account macro conditions, including currency and Microsoft’s plans to slow opex growth. The company continues to work with customers to lower Azure costs. While Microsoft is competing with AWS and other public cloud providers for enterprise business, the company is betting that its cloud offerings will be even more lucrative in the macro environment. Microsoft is enabling people to write applications on the cutting edge of efficiency.

Microsoft’s Talent Solutions segment, which includes recruiting, ad-based recruiting and training, suffered from weaker job postings toward the end of the quarter. Azure margin improved 12% in constant currency versus 46% a year ago, offsetting a seven-point decline from Nuance. Revenue from Azure and other cloud services rose by 40% compared with 46% in the prior quarter.

Microsoft and Alphabet’s cloud services divisions both reported healthy quarterly results. Alphabet, the parent company of Google, reported higher revenue than expected. However, Alphabet’s revenue grew 23% to $68 billion, but the company missed Wall Street’s expectations by only a narrow margin. In addition to announcing stronger financials, Microsoft said it had taken steps to differentiate itself from its competitors. For example, it purchased cybersecurity firm Mandiant to ensure the security of infrastructures across different industries. This move has benefited both clients and earnings.

Microsoft’s sales and bookings were healthy in the second quarter. Commercial bookings increased by 25% in dollars and 35% in CC. Meanwhile, the company’s commercial remaining performance obligation increased by 34% to $189 billion. Microsoft’s shares are down 1% AH and have fallen by more than 5% in the past year. The company will discuss guidance on the earnings call today at 5:30 ET.

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