Big Tech Earnings: Microsoft And Alphabet Signal Q2 Could Be A Bottom – Forbes | Hot Mobile Press

Big Tech’s earnings got off to a solid start on Tuesday, as Microsoft and Google reported resilient revenue growth and margins flat from recent macroeconomic conditions. The strong margins have been particularly welcomed as many companies have been missing operating margins and cash flow. Meanwhile, Microsoft delivered free cash flow of $17.8 billion and net income of $16.7 billion along with an upbeat guidance for the year. Similarly, Google reported strong free cash flow of $12.6 billion and net income of $16 billion last quarter.

The same wasn’t true for Meta, which mostly stumbled upon its Q3 guide. The company reported its first revenue decline in company history and missed guidance for the next quarter due to FX headwinds. Analysts’ expectations for the third quarter were $30.4 billion, or 5% growth. Instead, the company forecast $26 billion to $28.5 billion, or a 6% year-over-year decline at the midpoint of guidance, with current exchange rates generating a 6% headwind.

Alphabet: The search is resilient

The company reported revenue up 13%, or 16% at constant exchange rates, for a total of $69.7 billion. Operating margin was flat year over year, which is a win. Operating expenses increased 24%, but operating margin was 28% at $19.58 billion in operating income, flat with prior quarters.

At $16 billion, 2021 net margin was slightly weaker than previous quarters but was in line with the most recent quarter. The company has free cash flow of $12.6 billion. The company has $125 billion in cash and marketable securities. The company reported earnings per share of $1.21 compared to $1.36 for the same period last year.

Search has been resilient given the current environment, growing 13.5% to $40 billion, facilitating all ad spend not being suspended. Search was strong last quarter, growing 24% to $40 billion and was flat sequentially in terms of total dollars.

The impact of Google’s large R&D department and advances in AI cannot be overstated when it comes to the resilience of search in the current environment. We’re getting a very faint sense of what’s to come for Google in terms of its ad dominance.

Expectations were that YouTube would weigh on the report, despite YouTube posting modest growth of 5% year over year. The company insisted YouTube growth is slow due to stiff competition. The fierce competition was addressed many times, such as: “The modest year-on-year growth rate primarily reflects the lapping of the uniquely strong performance in the second quarter of 2021.”

Notably, Google Cloud’s growth slowed to 35.6% from 43.8% last quarter. That means Google Cloud is growing more slowly than Azure on a lower revenue basis. This is something that should be monitored in the future.

Microsoft: Two-digit guidance for fiscal year 2023

Many tech companies are reluctant to provide guidance, while Microsoft management has issued strong guidance for both the first quarter of fiscal 2023 and fiscal 2023. For the first quarter of fiscal 2023, management provided a 10% guidance for all product lines for the next quarter (this includes negative currency effects) and also provided guidance for fiscal 2023 ended June: “We continue to expect consistent double-digit sales – and Operating Income Growth Currency and US Dollars. Revenue growth will be driven by continued momentum in our commercial business and a focus on equity gains across our portfolio.”

Revenue rose 12% year over year to $51.9 billion (missing Wall Street analysts’ estimates by 0.94%) and earnings per share were $2.23 (missing estimates by 2.9%). The strong US dollar negatively impacted sales by $595 million and earnings per share by $0.04. Microsoft cloud revenue grew 28% year over year to $25 billion. The company’s results are good given the various macroeconomic uncertainties, the lockdown in China and the strong US dollar. Fiscal 2022 revenue increased 18% year over year to $198.3 billion and net income increased 19% year over year to $72.7 billion.

The company’s gross income increased 10% year over year to $35.4 billion. Gross margin declined 147 basis points to 68.2% compared to the same period last year. Excluding the impact of the change in accounting estimate, gross margin was relatively flat.

Operating income increased 8% year over year to $20.5 billion. Operating margin declined 187 basis points to 39.5%. Excluding the impact of the change in accounting estimate and foreign exchange rates, operating margin would be relatively flat.

The company’s cash flows continued to be strong in the most recent quarter. Cash flow from operations increased 8% year over year to $24.6 billion (47% of revenue) and free cash flow increased 9% year over year to $17.8 billion (34% of revenue). The company has $104.8 billion in cash and investments and $49.8 billion in debt.

Despite weakness in PCs, the company’s other segments continue to grow. Intelligent cloud grew 20% year over year to $20.9 billion and the productivity and business processes segment grew 13% year over year to $16.6 billion.

The company also made a change in accounting for the useful life of server and network equipment from four to six years, increasing the company’s depreciation expense.

Amy Hood said on the conference call, “First, beginning in FY23, we are extending the depreciable useful life for server and network equipment assets in our cloud infrastructure from 4 to 6 years, which will apply to the asset balances on our June 30th balance sheet. 2022 and future asset purchases.

Therefore, based on outstanding balances as of June 30, we expect FY23 operating income to be positively impacted by approximately $3.7 billion for the full fiscal year and approximately $1.1 billion for the first quarter.”

Meta: Misses Q3 expectations

With so many headwinds for tech companies, the market doesn’t need a perfect quarter for Q2. What the market needs is a sign that a company may have bottomed out and be able to steer growth (albeit minimal) from Q2 to Q3.

In the second quarter, Meta’s revenue fell for the first time in history. This was expected. However, what was not expected was the bottom line for the next quarter. The company was forecasting $26 billion to $28.5 billion, or a 6% year-over-year decline at the midpoint of guidance. The guidance takes into account the weak advertising demand the company experienced last quarter as well as the 6% negative currency rate. Investors were expecting growth to return in the next quarter.

The company recorded a slight hit on DAUs with 1.97 billion DAUs versus the 1.96 billion expected. Monthly users came in at 2.93 billion, slightly short of expectations of 2.94 billion.

Operating expenses increased 22% year over year to $20.4 billion. That drove operating margin down to 29% in the most recent quarter, compared to 43% in the same period last year. It also drove net income down 36% year over year to $6.69 billion. EPS was $2.46 compared to $3.61 in the second quarter of 2021.

The company is targeting a further reduction in operating expenses for the year to $85 billion to $88 billion, compared to last quarter’s guidance of $87 million to $92 million and the previous estimate of $90 billion to $95 billion.

We discussed why Meta is likely to continue to face headwinds in an in-depth webinar here:

Apple: Strong results despite challenges

Apple reported strong results despite the challenging macroeconomic environment, the strong US dollar and supply chain issues. Revenue rose 1.9% year over year to $83 billion, in line with analysts’ estimates. It reported earnings per share of $1.20, which beat estimates by $0.04 (4% better).

Products segment revenue declined slightly, down 0.9% year over year to $63.4 billion, and services segment revenue increased 12% year over year to $19.6 billion. The company’s installed base of active devices reached an all-time high. It had more than 860 million paid subscriptions, up 160 million from last year.

The company didn’t provide an accurate revenue guidance for the next quarter. Tim Cook, the company’s CEO, said on the conference call: “We will accelerate sales in the September quarter compared to the June quarter and decelerate on the services side.”

The company’s gross margin was 43.26%, compared to 43.75% in the previous quarter and 43.29% in the same period last year. It was above management’s guidance of 42% to 43%.

Net income was $19.4 billion, or $1.20 per share, compared to $21.7 billion, or $1.30 per share, for the same period last year. It beat analysts’ EPS estimates by $0.04.

The company had $179 billion in cash and marketable securities and $120 billion in debt. The company reported strong operating cash flow of $23 billion (28% of sales). The company returned over $28 billion to shareholders in the form of dividends and share repurchases last quarter.

Royston Roche, equity analyst at I/O Fund, contributed to this article.

Please note: The I/O fund conducts analysis and draws conclusions for the company’s portfolio. We then share this information with our readers and provide real-time trading alerts. This is not a guarantee of stock performance or financial advice. Please consult your personal financial advisor before buying any shares in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own Alphabet and Microsoft as of this writing.

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