June 29, 2017
Microsoft Misses Profit Estimates, Shares Dip 5 Percent Amid Weak PC Market

Microsoft Corporation announced on Thursday that its profits missed analysts' estimates due to a higher tax rate and a weakening market for personal computers.

MarketWatch reported Microsoft shares dipped roughly 4 percent immediately after the quarterly earnings report, which missed expectations, even while revenues for the multinational technology giant basically met their estimates, and fell as much as 5.2 percent, closing at $55.78.

Profit came in at 62 cents a share as opposed to average estimates of 64 cents per share for the third fiscal quarter, which ended March 31. Sales adjusted for deferrals were $22.1 billion according to data provided by Bloomberg, which fell in line with analysts' estimates of $22.09 billion. The earnings per share of 64 cents compares to 61 cents a share in the period a year earlier, and the revenue of $22.1 billion was roughly comparable to the year-earlier revenue of $21.73 billion.

Wall Street's profit forecasts did not include the one-time tax, and Chief Financial Officer Amy Hood argued in an interview quoted by Bloomberg that without the adjustment to the new tax rate in the quarter, Microsoft would have beaten expectations.

"The quarter's income tax expense included an adjustment to account for an expected increase in the full-year tax rate partly related to its cloud business, Hood said. As cloud uptake increases, that carries a higher tax rate for Microsoft than traditional software sales, she said. The full-year tax rate should be closer to Microsoft's usual 20 percent to 21 percent rather than the 24 percent adjusted rate in the fiscal third quarter, she said."
Dan Morgan, senior portfolio manager at Synovus Securities Inc., echoed Hood's sentiments regarding the tax.

"If not for the tax, the headline that goes out is Microsoft beats by two cents and then the stock goes up 3 percent," Morgan said to Bloomberg. "If you look at segment revenue it looks like a pretty good quarter. They seem to be doing what they say they're supposed to be doing."

Microsoft is struggling against a strong U.S. dollar and a declining market for PCs. The quarter was purely abysmal for global personal computer sales, which plummeted to their lowest levels since 2007. CNBC News quoted an April 11 report by research firm Gartner that said, "worldwide PC shipments declined 9.6 percent year over year in the first quarter, marking the sixth-straight quarter of PC shipment falls."

However, Microsoft's cloud services grew last quarter, with the Azure cloud computing platform and Office 365 showing rapid growth and an estimated annual run rate of $10 billion. The company said its cloud business grew a constant 8 percent last quarter to $6.1 billion. Azure revenue increased by 120 percent. Still, Dan Morgan said it grew slightly less than expected, with Microsoft's Intelligent Cloud unit bringing in a revenue of $6.1 billion, compared with the average $6.26 billion estimate by analysts.

"The more that grows, the more we get an indication that Microsoft will be a player here and they're not going to be a has-been," Morgan added.

Microsoft had pledged to reach an annual revenue of $20 billion in its cloud business by the end of fiscal year ending in June 2018. The company has been heavily promoting Azure, adding customers and workloads. In July, Microsoft announced it would cut as many as 7,800 jobs and take a restructuring charge as it scaled back on its mobile phone ambitions.

The Windows operating system used to be the flagship of Microsoft. Windows 10 is currently running on more than 270 million devices, but many see the famed software giant as being in a period of transition.

"It will take Microsoft from a company with Windows as its flagship to one that relies more on Office, Azure and the SQL Server database products; from a company that sells software for clients to install on their own PCs and in their own offices and data-centers to one that sells more services delivered in the cloud."

Fitch Ratings affirmed Microsoft's "AA+/F1+," giving them a stable rating outlook. Microsoft stock remained unchanged this quarter, as opposed to the 1 percent increase predicted by Standard & Poor's 500 Index.

[Photo by Mat Hayward/Getty Images for We Day]