Both Microsoft and Alphabet remain going concerns, according to the first of this season’s quarterly results from America’s mega-cap tech titans.
After slowing to a crawl, revenue grew 7% YoY at Microsoft in fiscal Q3 to $52.86 billion. Consensus expected $51 billion.
That’ll come as a relief. Top-line growth was just 2% the prior quarter, the most tepid pace in years. On a constant currency basis, revenue rose 10% over the same period a year ago.
Sales topped estimates across the company’s businesses. “This is a very solid report without any glaring negatives,” Vital Knowledge remarked.
All eyes were, of course, on Azure, which investors watch obsessively. In fiscal Q2 (so, the quarter before last), Azure sales rose 38% in constant currency terms, which was fine, all things considered. But Microsoft guided for a further deceleration on the call, unnerving investors in the process.
Fast forward three months, and Tuesday’s results showed Azure revenue growth slowed to 31% on an FX-adjusted basis. That was good enough, though, even as investors were cognizant of the potential for a “bad” guide (or a bad read on a good guide) to spoil the party again. Azure sales should rise between 26% and 27% on a constant currency basis in fiscal Q4, the company said later.
“Headline numbers look[ed] good, with Azure growth landing at the top-end of the guide,” JPMorgan remarked, of the results. Barclays noted that buy-side consensus for Azure growth was 28%-29% for fiscal Q3.
Amy Hood lauded the company’s “focused execution” in a “dynamic environment.” Satya Nadella alluded to the artificially intelligent elephant in the room. “The world’s most advanced AI models are coming together with the world’s most universal user interface — natural language — to create a new era of computing,” he declared.
Meanwhile, Alphabet likewise managed what looked like an across-the-board beat, and said it’ll buy back an additional $70 billion in Class A and C shares when it’s advantageous.
Q1 revenue at Alphabet was $69.79 billion, around a billion ahead of consensus. Top-line growth flatlined last quarter, and although Q1’s 2.6% YoY increase wasn’t gangbusters, it was passable in the current environment. Jefferies called it “a nice beat versus expectations for the worst.” That was probably supposed to be a compliment.
The ex-TAC print was $58.07 billion, a solid number versus consensus of $56.98 billion.
Ad revenue beat, and both Sundar Pichai and Ruth Porat touted “momentum in Cloud,” where operating income of $191 million looked pretty favorable against expectations for a half-billion dollar loss, although I imagine those forecasts are pretty fuzzy.
In search, Alphabet is suddenly staring at real competition from Microsoft thanks to the latter’s $13 billion investment in OpenAI. So far anyway, Google is behind in the race to destroy humanity with artificial intelligence, but as Vital Knowledge put it Tuesday, “the core Google search business exceeded Street forecasts, showing the firm isn’t losing any ground to Bing — at least for now.”
Last week, reports suggested Samsung considered replacing Google with Bing as the default search engine on its devices. A few days later, Google consolidated its AI work under the Google DeepMind banner. The unit is dedicated to “the bold and responsible development of general AI.”
Pichai said Alphabet has “introduced important product updates anchored in deep computer science,” and reiterated that the company’s “North Star” is still “providing the most helpful answers for our users.”
On its Tuesday evening analyst call, Microsoft said Azure OpenAI customers rose 10-fold from the prior quarter. GitHub’s AI co-pilot for business has 10,000 clients. Capex will rise “materially” as the company spends on AI. Microsoft, Hood promised, will “lead the AI platform wave.”
Other than weak topline growth, these two reports didn’t have a lot of nits to pick, in my opinion. Revenue growth either improved a little or didn’t get worse (other than business lines that investors don’t care that much about, like Windows OEM), especially ex-FX. Margins held up. The expense benefits from their RIFs are starting to become clearer. Cash flow was ample. I don’t see estimates going down much, if at all, from these reports.
60 Billion dollars in share buybacks eh? NOW I see why they just HAD to cut headcount. There just was NOT enough money for those employees. They are literally just scraping by these days and the people who build the systems that Alphabet is now profiting off of were just too expensive to keep around.
The hangover on our society from the Covid epidemic potentially bodes trouble for the US economy.
The NY Times has a story this morning that’s rattling my cage about corporate real estate and the debt structure supporting it being at risk due to diminishing occupancy. Office buildings in Manhattan are largely empty. But at the same time, rising interest rates are squeezing the banks that lend money to the owners of these properties and holders of their paper.
My wife rode the train to downtown Chicago today, as she does one day every week, paying her respects to office conventional behavior. I work at home exclusively. So I don’t go to Chicago at all for work. My employer is an international that has an office in the area, but not downtown.
I go to city events and visit socially. That’s it. I hear noise that suggests some office buildings may be selling space for residential use. But empty offices are a huge problem in Chicago as well. Likely that’s true in LA, Minneapolis, Houston, Dallas, Denver, Seattle, San Francisco, etal.
I would not want to hold paper on those properties. I would not want to be the bank either. If anything may be a factor that inspires another leg down in the economy, it’s easy for me to imagine fear about corporate and bank debt being a catalyst.
Just speaking common sense.