Microsoft, Alphabet Results May Underwhelm Anxious Markets

Alphabet and Microsoft kicked off mega-cap US tech earnings on Tuesday afternoon with what I’d describe as “mixed” results.

In fact, “mixed” might be too generous for Alphabet. Revenue of $69.09 billion was a lot of money, but not enough to match consensus. The Street was looking for almost $71 billion.

Top line growth was just 6% in Q3, down markedly from Q2’s 12.6% pace, which was itself the slowest annual growth since Google’s first ever revenue decline in 2020 (red bars in the figure, below). The ex-TAC print was likewise below consensus at $57.27 billion versus $58.2 billion seen.

On a constant currency basis (a phrase you should get used to) revenue grew 11%.

“Financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange,” Ruth Porat said Tuesday. The company is “working to realign resources to fuel our highest growth priorities.”

Resource “realignment” can mean a lot of things, but it sounds as though Alphabet, like plenty of other major US tech companies, is taking a hard look at how best to go about optimizing the business at a time when margin headwinds are myriad. The company’s operating margin in Q3 fell short of estimates — nearly 300bps short, in fact, at 25%.

At $54.48 billion, ad revenue was more than $2 billion short of expectations. The only standout beat I could see on a quick glance was Cloud, where revenue of $6.87 billion topped the $6.6 billion analysts saw. Operating income missed by a mile ($17.14 billion versus $19.71 billion seen), and EPS was 20 cents short at $1.06.

Sundar Pichai stressed that the company is “being responsive to the economic environment” and “sharpening our focus on a clear set of product and business priorities.” Again, that sort of language, while designed to shore up investor sentiment, almost invariably has the opposite effect. I’m not suggesting Pichai and Porat should’ve said anything different. It’s just that when you feel compelled to emphasize your commitment to efficiency and nimbleness, it’s typically a tacit acknowledgment that the operating environment has become significantly more challenging.

As for Microsoft, revenue of $50.1 billion was a bit better than estimates, but top line growth of 11% (rounded up from 10.55%, by the way) was the slowest in a long time (figure below).

On a constant currency basis (there’s that phrase again), sales grew 16%.

Net income dropped 14% to $17.6 billion. EPS of $2.35 was a slight beat. “Slight beat” actually described most of the key prints from the company’s report. Nothing stuck out as singularly concerning (other than the FX headwind, I suppose), but management commentary was cautious.

Satya Nadella described “a world facing increasing headwinds.” Fortunately, that kind of world is conducive to the many wonders of “digital technology,” which Nadella called “the ultimate tailwind.”

Like Pichai and Porat, Nadella pointed to investments in “secular growth areas,” and emphasized Microsoft’s efforts to manage the cost structure “in a disciplined way.” Customers, he said, are doing “more with less,” something the company is helping to facilitate.

Amy Hood touted $25.7 billion in Cloud revenue. That was up 24% and 31% in constant currency terms. It was in line with consensus. Expenses were up 15% and free cash flow down 10% (flat if you strip out a tax payment related to intangible property). A weaker economy impacted PCs, ad spend and LinkedIn, Hood said.

In the deck, the company mentioned lower margins in Azure due to “higher energy costs.” I’m no expert on this, but Azure growth of 35% (GAAP) might be viewed as underwhelming. It marked another deceleration. For context, Azure growth was 50% just four quarters ago. Stripping out the currency impact, growth there in fiscal Q1 2022 was 48%. Last quarter (fiscal Q1 2023), that figure was 42%.

Ultimately, I doubt the market will be ecstatic about the first of this week’s blockbuster tech results. Of course, a lot hangs on how analysts and investors interpret the companies’ respective calls, but in my view, there was no obvious reason to celebrate Microsoft’s numbers, let alone Alphabet’s.


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5 thoughts on “Microsoft, Alphabet Results May Underwhelm Anxious Markets

    1. I’m with you Dean. It will get worse. Furthermore, we won’t have a clear idea of where markets and the economy are headed until late Q2 or early Q3 next year. Not exactly fun, but not unredeemable.

  1. Call me silly and naive, but in my brain case anything growing at 40% in a no growth economy is unsustainable even in the intermediate term. The math just won’t work. Of course the growth in tech companies is slowing, it has to.

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