Big tech companies were able to benefit from stay-at-home orders and other COVID lockdowns compared to other companies. Since the end of 2021 however they have tumbled. The invasion of Ukraine still ongoing, commodities shortest abound, return-to-office orders, supply-chain disruptions, extreme inflation, murky forecasts from analysts. Big tech earnings results released this summer are a possible make-or-break trigger for the overall market.
Microsoft (MSFT) has already published their most recent earnings release (form 8-k) on Tuesday (July 26, 2022) for Q4 of their fiscal year. Microsoft’s fiscal year runs from July 1 to June 30. Their results were positive across the board:
- Revenue was $51.9 billion and increased 12% (up 16% in constant currency)
- Operating income was $20.5 billion and increased 8% (up 14% in constant currency)
- Net income was $16.7 billion and increased 2% (up 7% in constant currency)
- Diluted earnings per share was $2.23 and increased 3% (up 8% in constant currency)
Considering the amount of negative attention throughout the media, not bad. Microsoft’s CFO began the piece with a very optimistic note:
“In a dynamic environment we saw strong demand, took share, and increased customer commitment to our cloud platform. Commercial bookings grew 25% and Microsoft Cloud revenue was $25 billion, up 28% year over year. 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.”
Amy Hood, executive vice president and chief financial officer of Microsoft
Not everything was so bright. The release included the events which have weighed on Microsoft’s earnings:
- Unfavorable foreign exchange rate movement within the quarter negatively impacted revenue and diluted earnings per share $(595) million and $(0.04), respectively. Additional details are provided in the Earnings Call Slides.
- Extended production shutdowns in China that continued through May and a deteriorating PC market in June contributed to a negative impact on Windows OEM revenue of over $(300) million
- Reductions in advertising spend contributed to a negative impact on LinkedIn as well as Search and news advertising revenue of over $(100) million
- With the ongoing war in Ukraine, we made the decision to significantly scale down our operations in Russia. As a result, we recorded operating expenses of $126 million related to bad debt expense, asset impairments, and severance.
- As part of a strategic realignment of our business groups, we recorded employee severance expenses of $113 million, excluding Russia
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Digging deeper, Microsoft had higher operational cash flows, higher net cash used in financing, and lower net cash used in investing. The financing cash outflows involved stock buybacks and dividend payments, which will keep shareholders happy in the short term but have no long-term benefits for the company. The investing cash outflows involved less purchases of investments compared to the same quarter last year, which on a quarterly basis does not say much (but may spark the question of has Microsoft done enough investment activities during the previous year to justify less investments this time around, or is the current political and economic climate reducing good investments available?).
With all the problems in the world, Microsoft has still managed to hold its head above water and possibly position itself to continue to strive in the tumultuous times ahead. This provides not only a positive outlook for MSFT but for the rest of the Big Five (Alphabet, Amazon, Apple, and Meta) and the various etfs and mutual funds which hold their shares.
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