Microsoft offers lackluster guidance, says new business growth slowed in December

The technology company saw a dropoff in business at the end of 2022 in core Windows and Office areas, CEO Satya Nadella told analysts on a conference call.

Microsoft called for $50.5 billion to $51.5 billion in fiscal third quarter revenue, which works out to 3% implied growth, while analysts polled by Refinitiv had expected $52.43 billion. Amy Hood, the company's finance chief, said the PC market will contract again, which should lead to a roughly 17% year-over-year decline in the More Personal Computing business segment that features Windows.

Business weakened in December, including in growth of consumption of Azure cloud services, Hood said on the call. During that month, growth in new business was lower than management had expected for Microsoft 365 productivity software subscriptions, Windows Commercial products and Enterprise Mobility and Security offerings, Hood said.

"In our commercial business we expect business trends that we saw at the end of December to continue into Q3," she said.

Revenue in Microsoft's Intelligent Cloud segment amounted to $21.51 billion, up 18% and slightly above the $21.44 billion consensus among analysts polled by StreetAccount. The unit includes the Azure public cloud, Windows Server, SQL Server, Nuance and Enterprise Services. Revenue from Azure and other cloud services, which Microsoft does not report in dollars, grew by 31%, slightly above the average estimate of just under 31% from analysts polled by CNBC and StreetAccount. In the previous quarter, the category grew 35%.

Customers are looking to save money through optimization of existing workloads, and they're also being more cautious about new workloads, Nadella said.

The Productivity and Business Processes segment, containing Microsoft 365 (formerly known as Office 365), LinkedIn and Dynamics, delivered $17 billion in revenue, up 7% and more than the StreetAccount consensus of $16.79 billion. The Teams communication app now has over 280 million monthly active users, Nadella said.

The More Personal Computing segment featuring Windows, Xbox, Surface and search advertising contributed $14.24 billion, representing a revenue decline of 19%. Sales of Windows licenses to device makers declined 39% year over year, worsening from a decline of 15% in the fiscal first quarter. Technology industry researcher Gartner estimated that during the fourth quarter of 2022 the PC business had its slowest growth since the company started keeping track of the market in the mid-1990s.

Hood said its Surface group dealt with execution challenges in the quarter, during which the company introduced the Surface Pro 9.

Nadella said Microsoft pulled in over $20 billion in security revenue in 2022, up about 33% from 2021, when the growth rate was about 45%.

The decision to reduce headcount at Microsoft "shows a commitment to margin defense despite top-line shakiness," analysts at Raymond James wrote in a note to clients Monday. They recommend buying Microsoft shares.

Excluding the after-hours move, Microsoft stock is flat so far this year, while the S&P 500 stock index is up 4%.