Microsoft Shares Slide Despite Earnings Beat

Microsoft shares slipped 4% after hours following a disappointing close to the second quarter. The company posted earnings $2.69 per share, vs. the $2.55 per share street expectation.

Revenue rose 8% year over year in the fiscal fourth quarter, which ended on June 30, according to a company statement. Microsoft’s Intelligent Cloud segment contributed $23.99 billion in revenue, up 15% and above the $23.79 billion consensus of analysts surveyed by StreetAccount.

Azure revenue grew 26% during the quarter, faster than the 27% growth in the previous quarter and 40% in the year-ago quarter. Many tech customers have been pulling back on their cloud-computing spending. In boom times, Microsoft’s Azure cloud services would post growth rates of 50% or more. That growth has come down from peaks.

Microsoft, looking to reduce its own spending, laid off more than 1,000 employees in recent weeks. The latest layoffs are separate from the earlier layoffs that affected 10,000 employees.

AI Focus

Microsoft also has special access to some of the powerful and popular AI technology through its investment in OpenAI.

“We remain focused on leading the new AI platform shift,” said Microsoft Chief Executive Officer Satya Nadella in a written statement.

Demonstrating how AI could lift growth, Microsoft last week announced plans to charge businesses $30 a month per person for access to an AI-powered assistant for Microsoft 365, its popular workplace software that includes Word and Excel. The fee is more than double what Microsoft charges for the least expensive version of the software.

The company recently launched many of the AI products so investors won’t see much impact on sales, though early customer interest is strong, said Kendra Goodenough, director of investor relations at Microsoft.

“The demand signals and customer conversations are very real,” Goodenough said.

Software and Computing

Customer demand for Microsoft’s other businesses, including its workplace software and Windows operating system, continues to be slow. Sales of personal computers, which took off during the pandemic, have slipped in recent quarters.

Worldwide personal-computer shipments are down since the height of the pandemic, as the surge in PC sales has subsided and some workers have returned to the office.

The company’s videogames business grew 1%. Videogames and Microsoft’s Xbox videogame consoles are increasingly important businesses for the company.

Microsoft’s productivity and business processes segment that contains Office productivity software, LinkedIn and Dynamics delivered $18.29 billion in revenue, up 10% and more than the StreetAccount consensus of $18.06 billion.

Activision Merger

Last week, Microsoft and Activision mutually agreed to extend their merger deadline by three months in the face of ongoing negotiations with the UK government.

The new contractual deadline for consummating the deal will be October 18, the companies said. The previous deadline was July 18.

In addition, according to the filing, if the companies fail to complete their merger and Microsoft is forced to pay the breakup fee, the companies also agreed that beginning on Oct. 18 Microsoft would have to pay Activision “100% of all proceeds or other payments for games” that belong to Activision.

The revisions come after a significant milestone in the merger agreement following federal judges decision to prevent the FTC from blocking the buyout.