Microsoft profits strong despite Windows and Xbox sales slump

Microsoft Corp.’s second-quarter profit topped analysts’ estimates, helped by strength in its Azure cloud-services business even as demand slumped for personal-computer and corporate software. Shares rose more than 4% in late trading.

Adjusted profit was $2.32 a share in the period ended Dec. 31, and overall sales rose 2% to $52.7 billion, the company said in a statement.

That compared with average analysts’ projections for $2.30 a share in earnings and $52.9 billion in revenue, according to a Bloomberg survey.

In Microsoft’s closely watched Azure cloud-computing business, sales gained 38%, compared with predictions for a 37% increase, excluding the impact of currency fluctuations.

Microsoft last week said it’s firing 10,000 workers.

In the past quarter, the software giant’s growth engines have faltered as corporate customers became wary of spending in an uneven economic environment.

Still, Tuesday’s quarterly results underscored the software maker’s resilience, thanks to relatively steady demand for corporate cloud-computing services, even if gains are less robust.

Azure’s durability helped the company report growth even though sales of Windows software to PC makers fell sharply amid a shrinking market.

“The sentiment has gotten considerably worse than the last three months,” said Gil Luria, an analyst at D.A. Davidson.

The quarter’s results may have been a “relief to the stock, because actual expectations on the downside are even lower than that.”

Microsoft said it recorded a charge of $1.2 billion, or 12 cents a share, in the latest quarter, with $800 million of that related to the job cuts, which will affect less than 5% of its workforce.

The Redmond, Washington-based company said last week the charge will include severance, “changes to our hardware portfolio” and the cost of consolidating real estate leases.

The company’s shares rose as high as $254.79 in extended trading following the report, after closing at $242.04 in New York.

The stock declined 29% in 2022, compared with a 20% decline in the Standard & Poor’s 500 Index.

After years of double-digit revenue gains fueled by Microsoft’s accelerating cloud business, and robust growth during the technology spending spree of the Covid-19 pandemic, chief executive officer Satya Nadella acknowledged that the industry is going through a period of deceleration and will need to adjust.

The company’s sales increase in the fiscal second quarter was its slowest in six years.

“During the pandemic there was rapid acceleration. I think we’re going to go through a phase today where there is some amount of normalization in demand,” Nadella said in an interview at the World Economic Forum in Davos, Switzerland, earlier this month.

“We will have to do more with less — we will have to show our own productivity gains with our own technology.”

Cloud was one bright spot in a generally lackluster report.

Revenue in the period from commercial cloud products like Azure and Office productivity software rose 22% to $27.1 billion, Microsoft said the statement.

Intelligent Cloud sales, made of up Azure services and cloud-based server software, was $21.5 billion, slightly higher than the $21.4 billion average estimate of analysts.

Chief financial officer Amy Hood said the company remains optimistic about the cloud-computing market, and pointed to broader economic issues as the biggest challenge to the business.

“We’re not immune to the macro impact and I do think companies are more cautious, but it’s very early innings when it comes to cloud demand.”

Shares of Microsoft’s larger cloud-infrastructure rival, Amazon.com Inc., which reports results next week, rallied after Microsoft’s report, as did some smaller makers of cloud applications, including MongoDB Inc., Snowflake Inc. and Datadog Inc.

Even as Microsoft looks to cut spending on personnel and real estate, the company will continue to invest in long-term opportunities, Hood said in an interview.

One area of focus is artificial intelligence. Microsoft said Monday it will step up its stake in OpenAI, with a person familiar with the matter saying the new investment will amount to $10 billion over multiple years.

The software maker also plans to continue spending to expand the data centers that deliver cloud services.

That spending “is dictated both by near-term and long-term cloud demand,” Hood said. “Given that we continue to see such strong demand for cloud, you’ll continue to see us spend on capital.”

Revenue from PC-centered products, including Microsoft’s Windows operating system and Office productivity software, also slackened along with computer shipments.

Sales of Windows to PC makers plummeted 39% in the period.

Worldwide PC unit sales plunged 29% in the December quarter from a year earlier, according to Gartner Inc., the biggest drop since the market research firm began tracking in the mid-1990s.

Sales in Microsoft’s More Personal Computing unit, which also includes Xbox, fell to $14.2 billion, missing the $14.7 billion average analysts’ projection.

“We’re definitely in the hangover phase of the big PC cycle that work-from-home led during during the Covid pandemic,” said D.A. Davidson’s Luria.

“Everybody has a new PC right now. They’re not buying a new one.”

The company’s Xbox gaming unit reported double-digit revenue declines, reflecting a post-pandemic slump in the video-game industry in a year with few hit titles.

Microsoft said revenue from Xbox content and services, which includes digital video-game sales and subscriptions to Game Pass, fell 12%. Revenue from Xbox hardware dropped 13%.

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