Both Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) reported earnings for the second quarter on Wednesday and further fueled concerns of an economic slowdown.
How Did Alphabet Perform in Q2?
Google share price soared despite lower-than-expected profit and revenue for the second quarter. Google’s parent company reported revenue of $69.69 billion compared to analysts’ expectations of $69.9 billion.
This means revenue growth dropped to 13% in the quarter, from 69% a year before when the company performed much better following post-pandemic shoppers’ spending. Alphabet’s adjusted earnings per share (EPS) came in at $1.21, falling short of the consensus estimates of $1.28 per share, as per Refinitiv.
Based on StreetAccount data, YouTube advertising revenue came in at $7.34 billion vs. $7.52 billion expected and Google Cloud revenue stands at $6.28 billion vs. $6.41 billion expected. Traffic acquisition costs (TAC) were $12.21 billion compared to the consensus estimate of $12.41 billion.
According to the company’s CFO Ruth Porat, currency swings caused by a stronger dollar reduced revenue growth by 3.7 percentage points as he expects the dollar’s strength to have an even worse impact on the following quarter.
YouTube saw the most considerable slowdown with sales increasing just 5% compared to the 84% rise during the same period last year. Competition from TikTok and marketers limiting their advertising budgets due to inflation has been seen as the most significant reason behind Youtube’s underperformance.
“Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year on year growth rates of advertising revenues for the remainder of the year,” Porat said.
Although Alphabet didn’t disclose a revenue projection, Refinitiv reports that analysts anticipate an increase of 14% to $293.9 billion this year.
How Did Microsoft Perform in Q2?
Microsoft reported worse than expected results, marked by the slowest revenue growth since 2020. Shares still rose 5% as the results showed yet another impressive performance from the company’s cloud business Azure.
Revenue came in at $51.87 billion, falling short of the analysts’ estimate of $52.44 billion. The company reported adjusted earnings per share (EPS) of $2.23, vs. consensus estimates of $2.29 per share. The earnings per share results missed the Wall Street consensus for the first time since 2016.
Microsoft said it expects to generate between $49.25 billion and $50.25 billion in fiscal first-quarter revenue. The middle of the guidance signals a 10% revenue growth, and reflects weakening demand for PCs.
Analysts were looking for revenue of $51.49 billion. The company’s implied gross margin, at 69.85%, was better than the 69.30% consensus among analysts polled by StreetAccount.
Despite the results during inflation, the tech giant will stick to its initial projections for the upcoming fiscal year of 2023.
“We continue to expect double-digit revenue and operating income growth in constant currency and U.S. dollars,” Microsoft’s finance chief, Amy Hood, said to analysts.
Microsoft already lowered its quarterly revenue and profits projections in June solely due to exchange rate swings, which reduced revenue by $595 million and earnings by 4 cents per share.
Microsoft did not reveal Azure revenue in dollars, but the report shows that revenue from Azure and other cloud services rose by 40%, compared with 46% in the previous quarter and missing the consensus estimate of 43.1%.
“We are seeing larger and longer-term commitments and a record number of $100 million-plus and $1 billion-plus deals this quarter,” CEO Satya Nadella bragged about Azure’s profitable deals.
The company said that $300 million in Windows income from device makers was lost as a result of manufacturing closures in China in April and May and a deteriorating PC market in June, leading to a 2% decrease in Windows license sales to device manufacturers for the quarter.
Due to Russia’s invasion of Ukraine, Microsoft decided to stop selling goods and services there, incurring operating costs of $126 million as a result.
Microsoft stock price has fallen about 25% so far this year, extended trading excluded.
Summary
Alphabet and Microsoft shares soared after Q2 results although their reports showed weakening demand and strong macroeconomic headwinds.
