Microsoft reassures investors with confident full-year forecast

Microsoft shrugged off worries about the effects of a weakening economy with a confident forecast for its latest fiscal year on Tuesday, sending its shares up more than 6 per cent in after-hours trading.

The optimism came despite a sharp contraction in the personal computer market, the strong US dollar and signs of macroeconomic weakness, which combined to eat into Microsoft’s growth in the latest quarter, leaving revenue and earnings below the lowered guidance it issued last month.

Chief executive Satya Nadella said on a call with analysts that Microsoft had taken market share across its businesses and demand for its cloud services was expected to remain robust as many IT users look for more cost-effective ways of handling their computing.

“There is something going on in the macro environment that does feel it plays to our strength,” Nadella said, with cloud computing acting as a “deflationary force” that was helping Microsoft even as the economy weakens.

Microsoft’s shares have fallen 28 per cent from their November peak, in line with the Nasdaq Composite, as investors worried that it would be hit by declining consumer and business demand.

However, on Tuesday it predicted that growth in revenue and earnings in its current fiscal year, which began this month, would reach at least 10 per cent, even after the effects of a strong dollar.

The solid full-year guidance came despite a relatively weak forecast for the current quarter. Microsoft said it expected revenue of between $49.25bn-$50.25bn in the three months to the end of September, below the $51.7bn Wall Street analysts had been projecting.

The software company said its operating profits would be further boosted this year by a change in the depreciation of its servers and networking equipment. The gear would be written off over six years in future instead of the previous four, adding $3.7bn to operating income this year.

For the latest quarter, Microsoft said it missed out on $1bn in revenue compared with what it had expected three months ago due to further strengthening in the dollar, accelerating deterioration in the PC market due partly to production shutdowns in China, and weakening advertising spending. It also reported a $126mn charge from winding down much of its business in Russia and employee severance expenses of $113mn from a recent round of cost-cutting.

However, solid demand for cloud services enabled it to withstand much of the pressure. Revenue at its Azure cloud platform increased 46 per cent excluding the effects of the strong dollar, slightly slower than the 49 per cent growth of the previous quarter. It also reported a 35 per cent increase in cloud bookings in constant currency terms, in line with the opening months of the year.

The bookings were “significantly” above internal expectations and showed customers were making “larger and longer-term commitments” to the Azure platform, Nadella said.

The slump in PC sales left growth in Microsoft’s More Personal Computing division at 5 per cent in constant currency terms, compared with 13 per cent in the preceding three months. Global PC shipments fell 12.5 per cent in the second quarter, the biggest decline in nine years, according to the research firm Gartner.

Microsoft reported revenue of $51.9bn, an increase of 12 per cent from the year before, while earnings per share rose 3 per cent to $2.23. Wall Street had been expecting revenue of $52.4bn and earnings of $2.30 a share.

Excluding the effects of the stronger dollar, revenue growth slowed to 16 per cent, from 21 per cent in the first three months of 2022.