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Microsoft - revenue lower than expected

First quarter revenues were up 16% to $50.1bn ignoring currency movements.

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Revenue rose 2% on a reported basis to $52.7bn in the second quarter, which was slightly lower than the market was expecting. Ignoring the effect of exchange rates, growth was driven by double digit growth in Productivity and Business Processes, which includes Office 365 and LinkedIn, and Intelligent Cloud, which includes the Azure platform, rose more than expected. Ignoring the effect of exchange rates, More Personal Computing fell 16% to $14.2bn. This included double digit declines across OEM (which relates to software licensing) and Devices.

Underlying operating profit was flat when ignoring exchange rates, coming in at $21.6bn. This doesn't include a $1.2bn charge associated with the group's restructuring plans, including severance packages and lease cancellations.

The group had net cash of $51.4bn as at the end of the period.

Microsoft returned $9.7bn to shareholders through share repurchases and dividends in the second quarter, down 11% compared to the same time last year.

The shares fell 1.7% in pre-market trading.

View the latest Microsoft share price and how to deal

Our view

Microsoft's dealing with a marked slowdown in personal computing revenues, which reflects the incredibly challenging consumer environment. Buying a new laptop and the software that comes with it is simply not a priority for many people right now.

News of sweeping job cuts is front of mind too, with a $1.2bn hit to profits. Severance packages and scrapping office leases are both incredibly expensive undertakings, but Microsoft clearly sees these as necessary evils as it battens down the hatches.

Despite the shorter-term challenges we still take the view that Microsoft is an enviable mashup of great businesses. It makes products none of us can live without and owns an increasingly valuable stable of subscription-based products like LinkedIn and Office 365 Commercial. Plus, the pandemic kicked the door wide open for Microsoft's cloud arm, creating a growth runway that stretches well into the future.

The brave new world includes updated versions of old classics, like Office 365, as well as newer business management software like Dynamics. Increasingly those are being delivered as cloud-based services rather than desktop software programs. Through Azure, Microsoft provides customers with the necessary computing power on a pay-as-you-go basis, eliminating the need for companies to pay up front for the storage and upkeep of servers, giving corporate customers more freedom to scale up their tech offerings quickly.

Microsoft in the middle of the pack when it comes to Cloud competitors. Its focus is on making Azure an adaptable product that can sit together with any existing computing power. Combine that with a back catalogue of software programmes and it could be an attractive niche.

Such heady investment requirements mean not everybody can afford a seat at the table. Microsoft is one of the select few businesses which can, thanks to a highly cash generative core business.

That's left the group with plenty of firepower to make strategic acquisitions. Microsoft's planning to bring game-maker Activision Blizzard under the umbrella pending an investigation by the UK's Competitions and markets Authority, with an outcome expected by March. That will chip away at the group's balance sheet, but it should also stoke growth for its languishing personal computing arm, which comprises the likes of Xbox, and pre-installed versions of Windows on personal computers.

The group's also invested billions of dollars in the company behind ChatGPT, an artificial intelligence robot. An exciting future prospect but not something that will move the dial yet.

For now Microsoft's sitting on a net cash pile worth over $50bn.This has left plenty of space to return cash to shareholders through share buybacks and dividends.

The price/earnings ratio has come down sharply in the last year but remains around the long-term average, leaving it exposed to any deterioration in the business outlook.

Microsoft key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 25th January 2023