Microsoft shares rise on upbeat 2023 sales growth forecast

(Bloomberg) — Microsoft Corp. issued an upbeat sales forecast for the fiscal year that just began, easing investor concerns about explosive growth following a lackluster fourth-quarter earnings report. Shares rose more than 5% in late trade, reversing earlier declines.

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In a conference call on Tuesday, the software giant said it expects revenue and operating income to grow at a double-digit pace in fiscal 2023, which ends next June. Microsoft executives said currency fluctuations would reduce sales by about 4% a year and about 5% in the current quarter, worried that a stronger U.S. dollar would have an even bigger impact on the value of overseas sales.

The forecast is “shockingly strong,” said Dan Ives, an analyst at Wedbush. The forecast “will be the guidance heard around the world and across the street.”

Microsoft said it was attracting more large contracts for its Azure cloud-computing software and moving customers to more expensive versions of its Office cloud programs. After adding 11,000 workers planned for the current period, the company’s costs will fall as the pace of hiring slows as the year goes on. The turbulent economic picture may lead some customers to gravitate to Microsoft’s products and cloud software because it helps them control what they spend on technology, CEO Satya Nadella said on the call.

“As we come out of this macroeconomic crisis, the public cloud will be an even bigger winner,” Nadella said.

Microsoft shares rose to $269.41 in extended trading following the forecast. They fell about 2% immediately following the earnings report, after falling to $251.90 at the close in New York. While the stock is up 51% in 2021, it has fallen 25% so far this year amid a rout in major tech stocks.

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Earlier, the company reported fourth-quarter sales and profit that fell short of analysts’ forecasts, as unfavorable currency exchange rates and weak demand for cloud-computing services, personal-computer software and advertising on its online properties halted.

Revenue rose 12% to $51.9 billion in the fourth quarter ended June 30, the software maker said in a statement. Net income rose to $16.7 billion, or $2.23 a share. On average, analysts had estimated sales of $52.4 billion and earnings of $2.29 a share, according to a Bloomberg survey. Azure cloud-computing services revenue growth fell to 40%, a rate that also missed closely watched forecasts.

A rising U.S. dollar, which erodes the value of foreign sales, hurt revenue and profit in the latest quarter, prompting Microsoft to cut its forecasts in early June. The company has cut back on hiring in some divisions, such as Azure and Office, which make PC productivity software. Overall sales rose by the smallest amount since September 2020, and the broader personal-computer market is on track for an annual decline as Azure growth rates continue to slow. Demand fell further in the last few weeks of Microsoft’s quarter, as customers delayed purchases in anticipation of a global recession, said Cowen analyst Derrick Wood.

“After Memorial Day, things started to slow down and you started to hear more cautious buying behavior and longer sales cycles,” Wood said.

Analysts forecast Azure revenue to rise 44%, according to a note from Jefferies. In the third quarter of the financial year, the segment registered a growth of 46%.

Excluding the impact of currency, Azure growth was 1% lower than forecast in April, Chief Financial Officer Amy Hood said in an interview. However, he said the company has signed a record number of Azure contracts worth between $100 million and $1 billion.

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Business bookings, a measure of future sales to corporate customers, were “significantly” better than the company expected, rising 25%, he said, as corporate demand for Microsoft software remained strong in the quarter.

“We do most of our commercial booking business in June,” Hood said. “This was a record quarter for us and far better than we planned.”

Redmond, Washington-based Microsoft in June cut its sales and profit forecast for the fourth quarter, blaming the strong U.S. dollar on revenue of $460 million. The software giant on Tuesday said currency impacts during the period were steeper than it had forecast. The war in Ukraine prompted the company to scale back in Russia, leading to a $126 million accounting charge. In addition, hardware-production shutdowns in China and a poor PC market hurt sales of Windows operating system software to computer makers.

Microsoft recently recorded $113 million in severance payments. Earlier this month, Microsoft said it was cutting less than 1% of its 180,000-person workforce, affecting groups such as consulting and customer solutions, but said it planned to end the current fiscal year with higher numbers. The company has eliminated several open jobs and slowed hiring, including in units that develop Azure, Windows, Office and security software. The company said last week that these hiring restrictions will continue for the foreseeable future.

Microsoft’s overall revenue from cloud products, which includes Azure and web-based versions of Office software, rose 28% to $25 billion, the company said in slides posted on its website.

Google parent Alphabet Inc. reported earnings on Tuesday, while Apple Inc. And Inc. is wary of hiring — and shareholders are keeping a close eye on tech sector numbers. Social media companies Twitter Inc. and Snap Inc. It reported disappointing sales last week — and Microsoft blamed lower ad spending on its LinkedIn professional network and search division.

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Global PC shipments fell more than 15% in the quarter, according to IDC, well below pre-pandemic levels. Microsoft was able to record higher PC software revenue by shipping more versions of the more expensive corporate versions of its programs.

On the call, Microsoft executives said they expect weakness in the PC and advertising markets to continue.

(With the analyst’s opinion in the third column, and the CEO’s in the fifth column.)

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