Alphabet And Microsoft Missed Their Earnings Estimates

Key takeaways

• Alphabet and Microsoft released their earnings reports Tuesday after the bell
• Both tech giants missed estimates, though the damage wasn’t as bad as some feared
• Alphabet shares rose nearly 4.9% in after-hours trading, while Microsoft shares jumped around 4%
• Apple, Amazon and Meta stand among other firms preparing to release their quarterly financial reports this week

This week is big for tech giants and investors alike, with big names like Apple, Amazon,and Meta gearing up to release quarterly financial reports. The string of announcement will provide insights into how some of the world’s largest companies are handling inflation, ongoing supply chain issues, interest rate hikes and the war in Ukraine.

On Tuesday, the cascade kicked off when the Alphabet earnings and Microsoft earnings reports hit the market after close. While both companies fell short of expectations, they didn’t perform as badly as some feared.

Their performance also compared positively to Snap’s disastrous quarterly results and warnings that “forward-looking visibility remains incredibly challenging.” In contrast to snap, both Alphabet and Microsoft saw their shares rise in after-hours trading.

An Alphabetical quarter

Alphabet’s earnings for Q2 2022 hit the market Tuesday after close.

The tech giant reported revenue of $69.7 billion compared to $69.9 billion expected, slightly missing estimates. Its adjusted earnings per share (EPS) landed at $1.21 compared to the $1.28 expected by analysts.

All told, Google’s parent company raked in $16 billion in profit, down $18.5 billion from the year-ago period.

As with last quarter’s results, rising expenses seemed to play a part in Google’s lower-than-expected earnings. That said, Google also spent around $3 billion more on sales and marketing and R&D.

Management didn’t provide a revenue forecast with the Alphabet earnings report. Shares of the company jumped nearly 4.9% in after-hours trading, though the company remains down around 27% year-to-date (YTD).

A deeper look at the Alphabet earnings report

Compared to the year-ago quarter, Alphabet’s revenue is still up for most of its segments. That said, progress has definitely slowed, reaching just 13% this quarter compared to 62% a year earlier.

Some of the discrepancy is due simply to the economy moving further away from post-pandemic reopening expenditures. However, currency fluctuations and a stronger dollar knocked some 3.7% off revenue growth. CFO Ruth Porat predicts that the damage will hit even harder next quarter.

Among other highlights, Alphabet reported:

• Ad revenue of $56.29 billion compared to $56.14 billion expected
• Google Services revenue of $62.84 billion against expectations of $63.34 billion
• Google Cloud revenue of $6.28 billion compared to $6.41 billion expected, representing a loss of $858 million
• YouTube advertising revenue of $7.3 billion against the $7.52 billion expected
• A loss of $1.69 billion in the “Other Bets” segment, which includes self-driving car unit Waymo, venture arms and health-tech projects

All told, revenue excluding traffic acquisition costs came in at $57.47, falling shy of the $58.14 billion Wall Street predicted.

These numbers reflect an increase of 12% in advertising revenue even as marketers reign in spending amid rising inflationary pressures. The most notable deceleration occurred in the company’s YouTube division, where sales nipped up just 5% after jumping 84% in the year-ago period.

Noted CFO Porat: “Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year-on-year growth rates of advertising revenues for the remainder of the year.”

Headwinds and hiring pauses

Alphabet blamed its weaker-than-expected performance on factors like advertiser pullback, inflation and the threat of recession. However, it noted, search performance remains strong and customers continue to see value.

Still, Google recently informed employees that times could get tough. In early July, CEO Sundar Pichai warned that Google is “not immune to economic headwinds.” To handle the current environment, Google needs to “be more entrepreneurial, working with greater urgency, sharper focus and more hunger” going forward.

Just days later, employees received word that the company would temporarily pause hiring and take time to “review our headcount.” Moreover, Google plans on “slowing down the pace of hiring for the rest of the year.”

While some belt-tightening is expected, in Google’s case, it doesn’t necessarily spell doom and gloom. Just look at the numbers: in the year-ago quarter, Google employed with 144,056 full-time workers. As the latest Alphabet earnings report, Google counts 174,014 employees on payroll – a 21% increase.

Microsoft earnings: missed expectations but solid results

Microsoft’s earnings for Q4 2022 also hit the market after the closing bell, disappointing some investors and providing relief to others.

All told, Microsoft’s revenue came in at $51.87 billion compared to the $52.44 billion expected by analysts. At the same time, per-share earnings missed targets slightly, sliding in at $2.23 per share against $2.29 expected.

As with Alphabet, Microsoft blamed changing exchange rates and advertiser challenges among its financial woes. Problems in the PC markets dragged revenue down further in the quarter.

For the upcoming 2023 fiscal year, Microsoft reiterated its prior forecast of $49.25 billion to $50.25 billion. Noted Amy Hood, Microsoft’s CFO: “We continue to expect double-digit revenue and operating income growth in constant currency U.S. dollars.”

Microsoft shares rose around 4% in extended trading on Tuesday. However, its shares remain down almost 25% YTD.

A deeper look at Microsoft’s quarterly finances

Overall, Microsoft reported its slowest revenue growth since 2020, notching just 12% year-over-year (YOY) in the quarter. The company’s EPS also missed consensus estimates for the first time since 2016 as net income nicked up just 2% to $16.74 billion.

Among other highlights, Microsoft reported revenue of:

• $20.91 billion in its Intelligent Cloud segment (including Azure) against consensus of $21.10 billion
• $16.60 billion in its Productivity and Business Processes segment, slightly less than the $16.66 billion consensus
• $14.36 billion in the “More Personal Computing” segment featuring Windows, Xbox, Bing and Surface applications and devices, barely missing the $14.65 billion expected

All told, Microsoft’s Azure and cloud service segment grew by 40%, with CEO Satya Nadella boasting about bigger and better contracts. Noted Nadella: “WE are seeing larger and longer-term commitments and a record number of $100 million-plus and $1 billion-plus deals this quarter.”

Azure aside, Microsoft stated that its search and news advertising – excluding traffic acquisition costs – rose 18% thanks to higher search volume and per-search revenue. Still, tighter ad spending reduced revenue by nearly $100 million for Microsoft’s search and news advertising and LinkedIn categories.

Additionally, Microsoft was one of many companies that felt the impact of a 12.6% industry-wide decrease in quarterly PC shipments. In particular, shutdowns in China in the spring and a declining computer market in the summer reduced Windows revenue from device markers by $300 million.

Microsoft earnings: a brief analysis

Microsoft cited a range of factors that affected its financial results, including the war in Ukraine, decreased advertiser spending and prolonged Covid-19 shutdowns in China. The company incurred $126 million in operating expenses tied to its decision to halt sales in Russia following its invasion of Ukraine.

Additionally, an increasingly-unfavorable foreign exchange rate environment ate into the company’s overseas revenue. In June, Microsoft reduced its quarterly income and revenue guidance due to rate fluctuations, with actual losses due to exchange rates amounting to $595 million.

Said Microsoft CFO Amy Hood in a statement: “As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth.”

Alphabet and Microsoft earnings: Stay atop the trends with Q.ai

The Alphabet and Microsoft earnings provided both relief and disappointment for investors. While the results weren’t as bad as they could have been, they also largely failed to live up to Wall Street expectations. They also set the stage for the rest of the week, as investors await earnings from the likes of Apple, Meta, Amazon and more.

As an investor, following company earnings is a great way to keep abreast of important company news and industry developments. At the same time, it’s a potentially time-consuming process that requires dedication – especially with a well-diversified portfolio.

Fortunately, Q.ai is here to make your life easier. With our Emerging Tech Kit, you can stay atop tech trends as they happen, all without wading through the nitty-gritty details of every new earnings release.

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