Shares in Microsoft Corporation (NASDAQ: MSFT) fell by 2.68% yesterday after the company released its fourth-quarter earnings report. This was due to the company missing revenue and earnings estimates. However, its stock is up over 3% pre-market as the initial investor overreaction subsided and the company's positive guidance was considered.
Here are the key takeaways from Microsoft's fourth-quarter earnings report:
Microsoft saw sales of $51.9 billion in the quarter, 12% higher than the previous year. This was roughly $500 million less than analysts had forecast, leading to disappointment from investors.
Productivity and Business Processes was the segment with the largest under-performance -- a figure of $2.3 billion -- due to lower advertising spending and cloud infrastructure growth. The More Personal Computing segment saw the slowest year-over-year growth at just 2%. This was due to falling Xbox and Windows OEM sales as lockdowns continued in China, adding to the already rough supply chain conditions.
The company also claims unfavorable foreign exchange rate movements impacted revenue by $595 million. This is understandable as the stronger dollar lowers a company's sales if it has significant operations in international markets.
Earnings per share were up by 3% year-over-year to $2.23, but this fell below analyst expectations of $2.29. This was the first time since 2016 that the company has missed an earnings consensus. Microsoft recorded operating expenses of $126 million from scaling down its Russian operations due to the war in Ukraine, while also paying out $113 million in employee severance expenses.
In the company's earnings call, CEO Satya Nadella announced:
"Just two weeks ago, Netflix choose us as its exclusive technology and sales partner for its first ad-supported subscription offering."
This should help boost Microsoft's advertising division, which contributes roughly 6% to its sales and saw lower spending in the quarter as companies tighten their budgets amid macroeconomic concerns.
Mr. Nadella was optimistic during the company's conference call, boasting about the contracts the company was winning with large clients in its digital infrastructure and advertising space.
The CEO said that Microsoft was seeing larger and longer-term commitments with Azure. He also claimed that the company won a "record number of $100 million-plus and $1 billion-plus deals this quarter."
With PromoteIQ, Microsoft is providing a platform for retailers like Home Depot, Kohls, and Kroger to build their digital commerce marketing channels. The company is also creating a new monetization engine for the web to support customer privacy and strong data governance, while also providing marketers with more long-term ad solutions.
Microsoft is betting big on advertising spending making a comeback. While this may not be a short-term profit generator, it does have the potential to generate long-term recurring revenue. This will allow it to more effectively compete with digital advertising giants such as Alphabet (NASDAQ: GOOG) -- which also saw disappointing earnings yesterday.
This ambitious outlook sent Microsoft's shares up 3.62% in pre-market trading. However, the company's share price is still down 24.75% this year, greatly outpacing many of the indexes it is part of.
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