For the October-December quarter, Microsoft reported a drop of 12% in revenue, showing economic uncertainty that it said had led to its decision to cut 10,000 jobs. The company reported quarterly earnings of $16.43 billion, or $2.20 per share. Excluding one-time items, Redmond said that it earned $2.32 per share, beating Wall Street expectations for adjusted earnings of $2.29 per share. Analysts polled by FactSet had expected Microsoft to post revenue of $52.99 billion for the October-December quarter.
Microsoft is one of several tech companies, including Google, Amazon, Salesforce, and parent company Meta, to announce mass layoffs. Microsoft’s PC business, centered on its Windows software, was widely expected to continue a deterioration that began early last year due to economic uncertainties and limited demand. Sources reported that worldwide PC shipments fell 28.5% in the October-December quarter compared to the same period in 2021. Factors dampening consumer demand for PCs included increased inflation, higher interest rates, expectations of a global recession, and the fact that many people had already bought new PCs during the COVID-19 pandemic, Gartner said.
With the PC market weak, analysts closely watched the results of Microsoft’s other big business segments, specifically its cloud computing division and office suite for the workplace.
Why Are Microsoft Shares Falling?
One of the reasons Microsoft’s stock has fallen is that big tech companies, darlings of Wall Street for many years, have fallen out of favor. The Nasdaq Composite is down roughly 24% this calendar year. Call it guilt by association. However, one of the lingering concerns for potential investors in MSFT is the supply chain issue resulting from the extensive COVID-related bans in China.
The current macroeconomic climate, as well as the prevailing sense of uncertainty, has some investors worried that Microsoft’s customers could cut back on technology spending. If a recession were to hit, business search engine Bing and professional network LinkedIn would suffer because advertising revenue is closely tied to consumer spending.
Another set of negative headlines that could weigh on sentiment is the revelation that MSFT has lost a significant percentage of its employees dedicated to HoloLen’s development. In the nascent battle to become the metaverse’s dominant company, more than 100 members of Microsoft’s HoloLens team have deserted, with 40 going to work for rival Meta (FB). Although Microsoft’s latest earnings beat estimates, it was also an example of how good news can be bad. Q3 posted the smallest sales beat since 2018, narrowly beating estimates.
Throw in the fact that sales and marketing spending grew at its fastest pace in more than three years, up 10% from the year-ago quarter, and you have reason to pause. These are all legitimate concerns that investors consider; however, the stock took another hit late last week when Microsoft management provided updated guidance for the final quarter of FY22. While Microsoft led the way during some of the most innovative and remarkable technological advances (e-readers, cloud computing, social networking, smartphones, tablets, and consumer commerce to name a few), it failed to capture these and other major market opportunities, although they were perhaps better placed to do so than any other company.
Years ago, as disruptive upstarts, Microsoft pointed a collective finger at IBM and laughed, yet seemingly became what they once despised – defenders of the status quo. Microsoft has also differentiated itself from Apple by only dealing with software, but with the recent examples of the Xbox and its new “Surface” tablet, and the non-exclusive speculation of a Microsoft smartphone, it seems that Microsoft has capitulated on this principle and is starting to favor integrated solutions that combine hardware and software, and some would argue that they are following Apple and losing what’s left of its soul in the process.
Microsoft is not innovating fast enough or aggressively enough. Office and Windows are becoming less and less relevant. Once the de facto standard of the business world, both are under aggressive attack, being replaced by cheap, easy-to-use software, most of which is free and compatible too. That’s a big deal considering that, according to the Wall Street Journal, roughly 85% of Microsoft’s revenue (and an even higher percentage of its profit) comes from just two products: Windows and Office. This lack of innovation, due in part to Microsoft’s flawed corporate culture, has forced Microsoft to play defense by pursuing faster, more innovative firms.
“Microsoft Cloud revenue reached $27.1 billion, up 22% year-over-year (up 29% in constant currency), as our commercial offerings continue to drive value for our customers,” CFO Amy Hood said in a press release. Azure and other cloud services reported revenue growth of 31% or 38% in constant currency. That beat viewership for 37% growth in constant currency.
Windows PC, Device sales Fall In Microsoft
Finally, Microsoft’s More Personal Computing unit saw revenue fall 19% to $14.2 billion. The unit includes Windows computer software, Xbox video games, Surface computers, Internet search, and advertising. Windows licensing revenue fell 39% in the pre-Christmas sales quarter as PC sales fell. Equipment sales also fell by 39%. Brent Thill, a Jefferies analyst, said the results of Microsoft were “better than expected.” MSFT rates the stock as a buy with a price target of 280.
Microsoft took a $1.2 billion charge related to severance costs and other restructuring expenses in the quarter just ended. A recession affects every business differently; the challenges it creates for large firms are different from those it presents for smaller businesses. For example, a small business may experience changes such as cash flow issues and problems in making and receiving payments. While on the other hand, a large company can save on operating costs by cutting jobs and laying people off.
Understanding how an economic downturn would affect business would help companies ensure that they can keep their operations afloat no matter how challenging the business environment is. Large companies do not see the impact of a recession as immediately as small businesses. They would most likely be wary of a spiraling recession once the downturn shows up in quarterly earnings reports. And that’s why stock prices can suffer because recessions are often preceded by a bear market. Companies are often forced to withhold dividends from shareholders if the decline in profits is particularly steep.
But because large companies have a lot of labor and capital, they can pivot endlessly to ensure that their margins remain sufficient to help the company. Even a whiff of recession and big companies would institute hiring freezes and freeze pay raises. In desperate conditions, the company would resort to layoffs. Further focus on reducing capital expenditure, marketing, research, and development. Such budget cuts would help the company free up cash, but these actions would also have a ripple effect on employees and suppliers. Some companies often realize operating cost savings without cutting employees, while long-term strategic investments during recessions tend to outperform those that do.
During a recession, aggregate demand falls, which translates into a drop in sales for most businesses, until and unless your business can meet basic day-to-day needs. Interdependent industries often face the worst impacts because their needs and products are often co-dependent on the production of other inputs. As market demand slows due to a lack of cash liquidity, demand also loses steam, forcing sellers to stock up on inventory that can be slowly sold off at the right prices. In times like these, it is essential to keep your investment safe and in a position to bring you returns.
Edited by Prakriti Arora
