Why Microsoft’s Profits Are Plummeting To Concerning Lows
Microsoft reported a double-digit slump in computing sales for its third-quarter due to a massive decline in consumer demand for personal consumers, but they did do well in terms of software, reporting increases in revenue for Azure Cloud Services and Microsoft Teams.
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Microsoft reported a double-digit profit decline for the third quarter of 2022. The tech giant says the 14% net income decrease from a year ago is due to the economic slump and a slowdown in the personal computing industry. Even so, the tech giant’s revenue grew 11% to $50.1 billion which analysts say is better than expected.
There were a few bright spots in Microsoft’s third-quarter reporting. The company’s Azure cloud services revenue increased 35% from the previous year as more companies begin to rely on technology to cut costs. However, analysts said even that seemingly impressive growth was slower than they had hoped for.
Another healthy division of Microsoft is its diverse portfolio of business services including Outlook and Teams. These tools have made Microsoft an essential part of day-to-day operations in businesses seeking to adopt flexible work models. The demand for these tools remains strong, enabling Microsoft to retain and attract customers despite a drop in PC sales.
Microsoft and other tech companies enjoyed a massive boom in demand for personal computing during the COVID-19 pandemic. But as most kids are back inside the classroom and in-person meetings replace Zoom calls, the industry is experiencing a natural drop in demand. As consulting firm Gartner reported earlier this month, worldwide PC shipments dropped 19.5% in 2022’s third quarter compared to the same quarter of 2021.
Revenue from Microsoft’s Windows OEM operations also fell significantly in the same period, down 15% from 2021. Even the demand for gaming has dropped over the past year. Xbox content and services revenue dropped 3% and Microsoft reported laying off employees in the Xbox division to save costs.
Investors are concerned because the company’s stock has fallen more than 25% since January 2022. Still, given the impact of rising inflation, geopolitical uncertainty, and other macroeconomic issues, the decline is hardly unexpected. In a statement concerning the quarterly results, Microsoft CEO Satya Nadella said, “In this environment, we’re focused on helping our customers do more with less while investing in secular growth areas and managing our cost structure in a disciplined way.”
Analysts also see Microsoft’s earnings report as a “mixed bag” of good and bad outcomes. Haris Anwar, the senior analyst at Investing.com, said, “It shows that Microsoft is weathering the economic storm better than other technology players and its diversified business model is playing a big role in doing so.”
Anwar also expressed concern over the slower-than-expected Azure cloud growth. “If this growth deceleration continues, it could harm an investment case in the company’s stock which is considered a safe haven amid the market turmoil, with these concerns reflected in the company’s shares being down in extended trading.”
Xbox division employees weren’t the only ones being laid off at Microsoft after the third-quarter results were posted. The tech giant laid off around 1,000 employees across several divisions in mid-October as it eliminated some roles to save money. Although that sounds like a lot, it only reflects a small percentage of the company’s total workforce of 221,000.
During a conference call with investors, Microsoft chief financial officer Amy Hood said that some of the problems affecting the company could extend into the near future. She predicted minimal headcount growth in the fourth quarter of 2022. Hood also attributed the Azure cloud’s slower-than-anticipated growth to rising energy costs because powerful data centers have high energy use requirements.
This year has been tough on technology companies in general. Twitter, Snap, and Meta have also cut back on hiring and trimmed jobs from their payrolls. With higher interest rates, the energy crisis in Europe, and rising inflation it’s difficult to predict when Microsoft and other tech firms will recover.
