One clear theme dominated Microsoft’s earnings call

Microsoft got a few high fives from Wall Street on Tuesday night as its quarterly Azure sales bested analyst estimates amid an overall earnings beat. Microsoft’s stock initially popped 4% in after-hours trading.

Then came the earnings call, where a clear theme emerged: caution.

While Microsoft execs struck an upbeat tone on the long-term impact of its partnership with OpenAI maker ChatGPT, the earnings call was noticeably downbeat from an economic standpoint — and by extension, a demand standpoint. The tone went a long way in explaining why Microsoft fired 10,000 employees last week in a major cost-cutting exercise.

Shares of Microsoft were roughly flat in premarket trading on Wednesday as of around 5:45 AM.

“We are lowering our FY23 growth from 7.1% to 4.8% year over year (10%+ year over year constant currency guidance rescinded) as macroeconomy continues to weigh on results with tough comparables and lowest commercial bookings growth in five years,” Jefferies analyst Brent Thill wrote in a client note.

Yahoo Finance combed through Microsoft’s earnings call looking for all of the Big Tech giant’s clues on the state of the global economy.

Here’s what we found (emphasis ours):

  • As I meet with customers and partners, a few things are increasingly clear. Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. Also, organizations are exercising caution given the macroeconomic uncertainty.

  • So, the question is, how many times is it given the overall inflation-adjusted economic growth? So, that’s kind of how I look at it. Given that, I think the two things that we see — we commented on that even in the last quarter, and it’s even in the outlook, which is the thing that customers are doing is what they accelerated during the pandemic. They are making sure that they’re getting most value out of it or optimizing it. And then also being a bit more cautious… given the macroeconomic headwinds out there in the market.

  • The market, you all are better readers of, quite frankly, what’s happening out there. We can tell you what we see. What we see is optimization and some cautious approach to new workloads and that will cycle through, but we do fundamentally believe on a long-term basis, as a percentage of GDP, tech spend is going to go up.

A participant walks past a Microsoft board during the World Economic Forum (WEF) annual meeting in Davos on January 18, 2023. (Photo by Fabrice COFFRINI / AFP) (Photo by FABRICE COFFRINI/AFP via Getty Images)

Microsoft CFO Amy Hood

  • However, as you heard from Satya, we are seeing customers exercise caution in this environment, and we saw results weaken through December. We saw moderated consumption growth in Azure and lower-than-expected growth in new business across the stand-alone Office 365, EMS, and Windows commercial products that are sold outside the Microsoft 365 suite. From a geographic perspective, we saw strong execution in many regions around the world. However, performance in the U.S. was weaker than expected.

  • LinkedIn and search will be impacted as ad market spending remains a bit cautious. In our Commercial business, we expect business trends that we saw at the end of December to continue into Q3. While customers are more cautious in their spend, we also have the opportunity to improve our execution, given our strong position in global growth markets.

  • For LinkedIn, we expect mid-single-digit revenue growth with continued strong engagement on the platform, although impacted by the advertising trends noted earlier and the slowdown in hiring, particularly in the technology industry, where we have significant exposure.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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