News Economic slowdown squeezes earnings for Microsoft and other tech giants
- Microsoft PC sales plummet
- Advertising market continues to weaken
A quick rebound in the tech sector looks even more unlikely as the U.S. giant used its December-quarter earnings announcements to give investors a realistic look at how the year is trading.Although Microsoft (US: MSFT) Last week’s quarterly results topped analyst expectations, and downbeat forecasts on the earnings call spooked markets.Disastrous results for chipmakers follow Intel (US: INTC) and some negative guidance Snap (US: SNAP) This casts further doubts about the US ad market.
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Microsoft’s revenue rose 2% in the final quarter of 2022, but its operating profit fell 8% to $20.4bn (£16.6bn). However, most of the hit came from higher R&D spending (an increase of $1.1 billion), so gross margins were largely unaffected. The diversity of businesses means that there are huge performance differences between departments. Pressured consumer spending fell, with personal computing revenue down 19% and Xbox content and services down 12%.
Business services, on the other hand, continued to grow. Azure, the cloud computing business, grew 31%. That was slower than previous quarters, but still much faster than the broader U.S. economy. All of this helped Microsoft beat analysts’ profit expectations.
Shares initially rose, but Microsoft was cautious on the earnings call. Azure cloud growth is expected to slow again as customers reduce spending. “We expect third-quarter growth to be down about 4 to 5 percentage points in constant currency,” Chief Financial Officer Amy Hood said.
At Intel, the results were much worse. Revenue fell 32% YoY in the fourth quarter, and gross margin fell 14.5 percentage points to 39.2%. Client computing revenue fell 36%, and data center and artificial intelligence fell 33%. This represents a significant decline in market share compared to the broader growth of cloud computing.
Last year’s shortage of chips and electronics quickly turned into an oversupply. “The PC ecosystem continues to consume inventory throughout 2022,” said Intel CEO Patrick Gelsinger.
Intel expects this to drag on until 2023, and its guidance for the quarter was terrible. The company expects revenue to be between $10.5 billion and $11.5 billion, down 20% from the fourth quarter. Gross margin is also expected to decline further to 34.1%.
Apple Inc. (US: AAPL) It is by far the steadiest of the big tech companies and the only one that hasn’t laid off workers. However, analysts now expect weaker demand for consumer electronics to hit sales. Analysts’ consensus forecast was for sales of $121.5 billion, down 2 percent from last year, according to FactSet. This was driven by lower demand for iPhones, which may have fallen 6%.
Samsung (KR:005930) The results released this week did not look good for Apple, which was due to release a post-launch report on Thursday, February 2. Operating profit at the South Korean company, which supplies DRAM memory chips for the iPhone, fell 70% in the fourth quarter. For PCs and mobile devices, “demand declines are intensifying across the industry,” said Jaejune Kim, vice president of the memory division.
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Alphabet (US: GOOGL) and Yuan (US: META) Both companies generate more than 80% of their revenue from advertising, and sentiment collapsed last year amid a slump in advertising. Alphabet’s sales are expected to rise 1% year-over-year, while operating profit is expected to decline 16%. The outlook is even worse for Meta, which is suffering due to Apple’s new privacy laws and the recession. Sales are expected to fall 6% to $31.6 billion and operating profit to drop 40% as virtual reality losses widen to $4.4 billion.
Shares of Snap, another social media and advertising company, fell 12% this week after forecasting a 2% to 10% year-over-year revenue decline next quarter. The company said in a letter to investors that this was due to “weakening demand for brand-led advertising.”
Amazon (US: AMZN) It is the most diversified tech giant. It’s a consumer retail business, but it’s also increasingly an advertising business. It also owns Amazon Web Services, the fast-growing cloud computing unit. Analysts expect a decline in consumer retail sales to be offset by growth in advertising and cloud sales, with group revenue expected to rise by 6%. However, rising labor costs mean operating profit is expected to fall by 23%. The company doubled its workforce during the pandemic before laying off workers late last year.
The technical story for 2022 is rising interest rates, but now that U.S. inflation is falling, all eyes will turn to earnings. Most of these companies have already begun cutting costs, but investors will focus primarily on companies with pricing power. Microsoft’s focus on enterprise software and cloud computing makes it more defensive; customers will cut advertising budgets ahead of software spending. Apple’s storied brand strength helps, but there’s a limit to how far consumers can extend their fortunes to a new iPad or Apple Watch. The chip shortage in 2021 now seems to be a long time ago.