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Microsoft's Earnings May Have Dropped Last Quarter Due to Economic Worries

Microsoft Corporation (MSFT) is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services.

January 24, 2023
6 minutes
minute read

Microsoft Corporation (MSFT) is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services.

Its best known software products are the Microsoft Windows line of operating systems, the Microsoft Office suite, and the Internet Explorer and Edge web browsers.
Microsoft is likely to have recorded its slowest sales growth in more than six years last quarter, as economic concerns cooled demand for its software and cloud services. The Redmond, Wash., company’s revenue growth is expected to slow to less than 3% in the three months through Dec. 31 from a year earlier, while its net income is expected to fall more than 8%, according to financial analysts surveyed by FactSet. They predicted that the company would post sales of $53.12 billion and net income of $17.21 billion for the period. This would be a significant slowdown from the company's previous growth rate.


The company's revenue growth for the quarter ending September 2016 would be its lowest since the quarter ending June 2016. The company is scheduled to announce results after the market closes on Tuesday. The software giant is the first of the tech titans to announce earnings for the quarter. It has recently announced layoffs of thousands of people to reflect a sudden lowering of expectations about future demand.


Last week, the company announced plans to eliminate 10,000 jobs in response to the global economic slowdown. This is the company’s largest layoffs in more than eight years. In a blog post to employees, Chief Executive Satya Nadella pointed to the shaky economy, saying companies globally had begun to “exercise caution as some parts of the world are in a recession and other parts are anticipating one.”


Microsoft has been largely sheltered from the recent economic downturn, as the majority of its sales come from businesses rather than advertising and consumer spending. However, the company is not immune to the end of pandemic-driven trends that have boosted demand, hiring, and investment, as well as to headwinds such as high interest rates.


Meanwhile, demand for Windows operating-system software has declined along with sales of the personal computers that use it. Households, companies and governments that bought computers during the pandemic are now scaling back. According to preliminary data from the research firm Gartner Inc., worldwide PC shipments were down 29% in the fourth quarter of last year compared to the previous year. Financial analysts don’t expect this trend to improve until 2024.


Microsoft is one of the top companies in cloud-computing services that have seen a boom during the pandemic. In the middle of the health crisis, Microsoft reported several quarters in a row of 50% or more year-over-year sales growth for its Azure cloud-computing platform, the world’s No. 2 behind Amazon.com Inc.’s cloud. While Azure and Microsoft’s other cloud services remain the main engine for the company’s growth, demand isn’t what it was even a year ago. The debate going forward is about the pace at which people will move workloads to the cloud, according to Brad Reback, an analyst at Stifel, Nicolaus & Co. The big question now is what the sustainable growth rate for cloud adoption will be.


Microsoft's intelligent cloud division, which contains its Azure cloud-computing business, saw a spike in usage during the pandemic as app usage increased. However, usage has since cooled off, and customers have become more mindful of their cloud bills, according to Mr. Reback. The company is betting that the next wave of demand for cloud services will come from more companies and people using artificial intelligence. It has been deepening its relationship with the AI startup OpenAI, which is behind the image generator Dall-E 2 and the technology behind ChatGPT, which can answer questions and write essays and poems.


Videogames and Microsoft's Xbox consoles are increasingly important businesses for the company. However, the videogaming industry is currently going through a slowdown due to pandemic-related restrictions easing and people spending less time at home. This could also negatively impact sales as consumers spend less.
A year ago, the company made a huge bet on the sector with its $75 billion plan to acquire videogame giant Activision Blizzard Inc. Last month, the Federal Trade Commission sued to block the acquisition, saying the deal would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft then filed a rebuttal saying the deal won’t hurt competition in the videogaming industry. It could take months before it is decided in the U.S. and elsewhere whether the deal can go through.


Microsoft's stock has declined by about 18% over the past 12 months, which is broadly in line with the tech-heavy Nasdaq Composite Index. Over the same period, Meta Platforms Inc.'s stock has plummeted by 53%, and Amazon.com Inc.'s stock has fallen by 32%.

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