Monday, September 16, 2024

Microsoft shares drop as cloud miss overshadows better-than-expected revenue and earnings

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Microsoft CEO Satya Nadella speaks during the Microsoft Build conference at Seattle Convention Center Summit Building in Seattle, Washington, on May 21, 2024. 

Jason Redmond | Afp | Getty Images

Microsoft shares fell 7% in extended trading on Tuesday as investors looked past better-than-expected earnings and revenue and focused instead on disappointing cloud results.

Here’s how the company did, compared with the LSEG consensus:

  • Earnings per share: $2.95 vs. $2.93 expected
  • Revenue: $64.73 billion vs. $64.39 billion expected

Microsoft’s revenue increased 15% year over year in the fiscal fourth quarter, which ended on June 30, according to a statement. Net income, at $22.04 billion, was up from $20.08 billion, or $2.69 per share, in the year-ago quarter.

The company’s top segment, Intelligent Cloud, generated $28.52 billion in revenue. It includes the Azure public cloud, Windows Server, Nuance and GitHub. The total was up about 19% and below the $28.68 billion consensus among analysts surveyed by StreetAccount. GitHub’s revenue is now at an annual run rate exceeding $2 billion, Microsoft CEO Satya Nadella said on a conference call with analysts.

Revenue from Azure and other cloud services grew 29% during the quarter. Analysts polled by CNBC and StreetAccount had expected 31% growth. Microsoft’s Azure number hadn’t fallen short of consensus since 2022. Microsoft doesn’t disclose revenue from the category in dollars.

Last week Google parent Alphabet said revenue from its cloud business, encompassing Workspace productivity software and Google Cloud Platform infrastructure, went up by about 29%. 

Microsoft’s cloud unit is of particular importance to Wall Street, as the company is battling with Amazon Web Services and Google for artificial intelligence workloads. All three companies are investing heavily to boost AI capabilities and to try and lure startups and big companies as generative AI models rapidly advance. For Amazon, AWS has been a critical source of profit for a decade.

Of the 29% growth for Azure and other cloud services, 8 percentage points came from AI services, Microsoft said.

“Our share gains accelerated this year driven by AI,” Nadella said. But demand for Azure AI services remained higher than available capacity, said Amy Hood, Microsoft’s finance chief. The company pointed to that trend in April. She said Azure growth in June was slightly lower than expected across some parts of Europe.

The Productivity and Business Processes unit that includes Office software and LinkedIn produced $20.32 billion in revenue. That’s up 11% and more than the $20.13 billion StreetAccount consensus.

Microsoft’s More Personal Computing unit, with the Windows operating system, gaming, devices and search advertising, contributed $15.90 billion in revenue. The outcome is up 14% and higher than the StreetAccount consensus of $15.49 billion.

The results benefited from a solidifying PC market. Sales of Windows licenses to device makers were up 4%. Technology industry researcher Gartner estimated that PC shipments during the fiscal fourth quarter increased 1.9%, up from 0.9% growth in the prior quarter.

In gaming, Microsoft now has over 500 million monthly active users across platforms and devices, Nadella said.

During the fiscal fourth quarter, Microsoft started selling Surface PCs with AI features that can run certain models locally without the need for an internet connection. Dell, HP and other device makers also touted their own so-called Copilot+ PCs. Nadella said at a press briefing in May that “we’re bringing real joy and a sense of wonder back to creation on the PC.”

Excluding the after-hours move, Microsoft stock is up 12% so far in 2024, while the S&P 500 index has gained 13% over the same period.

Executives will discuss the results and issue guidance on a conference call with analysts starting at 5:30 p.m. ET.

This is breaking news. Please check back for updates.

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