Microsoft Stock Falls Despite Strong Earnings

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Microsoft

shares were down about 5% in late-trading Tuesday, despite better-than-expected December quarter financial results.

The company’s fiscal second quarter, which ended Dec. 31, was driven by strength in the company’s PC business, but investors seem disappointed by performance in the company’s enterprise software segments, which only matched Wall Street estimates.

For the fiscal second quarter, Microsoft (ticker: MSFT) reported revenue of $51.7 billion, up 20% from a year ago, topping the $50 billion level for the first time. Earnings jumped 22% to $2.48 per share. Wall Street analysts had expected revenue of $50.9 billion and EPS of $2.31.

While Microsoft stock has tumbled about 15% this year, dragged down by the steep market correction, analysts had been generally upbeat heading into the software giant’s December quarter results.

“Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life,” Microsoft CEO Satya Nadella said in the earnings press release.

Revenue from the company’s Productivity and Business Processes segment, which includes Office and other applications was $15.9 billion, up 19%, in line with both the Wall Street consensus at $15.9 billion and the company’s guidance range of $15.7 billion to $15.95 billion. Revenue was up 14% for Office Commercial products and 15% for Office Consumer. LinkedIn revenue was up 37% from a year ago.

For the Intelligent Cloud segment, including Azure, revenue was $18.3 billion, up 26%, and likewise in line with Wall Street at $18.3 billion and guidance of between $18.1 billion and $18.35 billion. Azure revenue was up 46%, slowing from 50% growth one quarter earlier. Microsoft Cloud revenue, which also includes Office 365 and Dynamics 365, was up 32%.

Microsoft said revenue from its More Personal Computing segment, which includes Windows, Surface and Xbox, among other things, was $17.5 billion, up 15%, and ahead of both consensus at $16.6 billion, and the company’s guidance range of $16.35 billion and $16.75 billion. Search and news advertising revenue rose 32% in the quarter.

Windows OEM revenue—from PC makers—was up a surprising 25%, driven in particular by strong growth in enterprise PC demand. That was up from 10% growth in the previous quarter, and just 1% growth a year ago. Xbox content and services were up 10%, while Xbox hardware was up 4%.

It’s worth noting that the company had expected a one percentage point benefit from foreign currency in the quarter, but actually got no help from currency this time due to less-favorable than expected exchange rates. Commercial bookings were up 32% in the quarter, or 37% in constant currency, accelerating from 11% growth one quarter earlier.

Microsoft bought back $6.2 billion of stock in the quarter.

For the March quarter, Wall Street is projecting $48.2 billion in revenue and profits of $2.17 a share. The company’s practice is to provide guidance by segment on its post-earnings conference call.

Write to Eric J. Savitz at [email protected]