MSFT Beats Top- & Bottom-Line; But Shares Slide On Rising Cloud Costs, Margin Pressure

At first glance, earnings for the tech giant looked solid as Microsoft beat on the top- and bottom-lines:

• Revenue $50.12 billion (+11% YoY), better than the estimate of $49.56 billion

• EPS $2.35 (less than the $2.71 EPS for Q1 last year), but better that the estimate of $2.29

However, the top-line growth was the weakest since 2017…

The breakdown shows the company beating in all the segments (but cloud was barely a beat):

• Productivity and Business Processes revenue $16.47 billion, estimate $16.11 billion

• Intelligent Cloud revenue $20.33 billion, estimate $20.31 billion

• More Personal Computing revenue $13.33 billion, estimate $13.08 billion

• Commercial Cloud revenue $25.7 billion, estimate $25.66 billion

But while the CFO projected strength in cloud…

“This quarter Microsoft Cloud revenue was $25.7 billion, up 24% (up 31% in constant currency) year-over-year. We continue to see healthy demand across our commercial businesses including another quarter of solid bookings as we deliver compelling value for customers,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

Some traders pointed to problems, potentially affecting cloud margins as the MSFT slideshow discussed rising energy prices are boosting the costs of delivering cloud…

Gross margin dollars grew 20% (up 26% CC) and gross margin percentage decreased slightly. Excluding the impact of the latest change in accounting estimate for useful lives, gross margin percentage decreased roughly 3 points driven by sales mix shift to Azure and other cloud services and lower margins in Azure and other cloud services, primarily due to higher energy costs.

MSFT shares tumbled on the print, erasing all of the day’s gains…

“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” said Satya Nadella, chairman and chief executive officer of Microsoft.

“In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”