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Big Tech Earnings: Microsoft And Alphabet Signal Q2 Could Be A Bottom

Earnings at the big tech companies got off to a solid start on Tuesday as Microsoft and Google reported steady revenue growth and margins that were unchanged from recent macro conditions. the strong margins were especially welcome as many companies have had no operating margins and no cash flow. Meanwhile, Microsoft delivered free cash flow of $17.8 billion and net earnings 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 in the latest quarter.

The logo of the French headquarters of the American multinational technology company Microsoft, pictured… [+] Outside on March 6, 2018 in Issy-les-Moulineaux, a suburb of Paris. (photo by gerard julien / afp) (photo by gerard julien / afp via getty images)

Reading: Big tech earnings

The same did not happen with meta, which mainly stumbled on its q3 guide. the company reported its first drop in revenue in company history and guidance for the coming quarter was missed due to exchange rate headwinds. analyst expectations for the third quarter were $30.4 billion, or 5% growth. instead, the company guided $26 billion to $28.5 billion, or a 6% year-over-year decline at the midpoint of guidance with current exchange rates creating a 6% headwind.

alphabet: search is resistant

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

net margin was slightly weaker than previous quarters in 2021 at $16 billion, but in line with last 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 was flat given the current environment with 13.5% growth to $40 billion, which was a relief because all ad spend wasn’t stopped. search was strong last quarter with 24% growth to $40 billion, and was flat sequentially in terms of total dollar amount.

The effects of Google’s massive R&D department and advances in artificial intelligence cannot be underestimated when it comes to the resiliency of search in today’s environment. we get a very small glimpse of what lies ahead for google in terms of its ad dominance.

expectations were that youtube would weigh in the report, but youtube provided a small growth of 5% year over year. The company insisted that the growth of YouTube is low due to the harsh compositions. Difficult comparisons were mentioned many times, such as this one: “The modest year-over-year growth rate primarily reflects the outperforming of the exceptionally strong performance in the second quarter of 2021.”

Notably, Google Cloud slowed to 35.6% growth from 43.8% last quarter. This means that Google Cloud is growing more slowly than Azure with a lower revenue base. this is something to monitor in the future.

Microsoft: Fiscal Year 2023 Double-Digit Guidance

many technology companies refuse to provide guidance, while microsoft management provided strong guidance in both the first quarter of fiscal year 2023 and fiscal year 2023. for the first quarter of fiscal year 2023, management provided 10% guidance across all product lines for the coming quarter (this includes FX headwinds) and also provided guidance for FY2023 ending June: currency and US dollars growth in Revenue will be driven by continued momentum in our trading business and a focus on equity earnings across our portfolio.”

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Revenue grew 12% year over year to $51.9 billion (wall street analysts’ estimates missed by 0.94%) and earnings per share came in at $2.23 (missed estimates by 2 .9%). the strength of the US dollar negatively affected revenue by $595 million and eps by $0.04. Microsoft cloud revenue grew 28% year over year to $25 billion. The company’s results are good considering the various macroeconomic uncertainties, the closure of China and the strength of the 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 revenue increased 10% year over year to $35.4 billion. gross margin decreased 147 bps to 68.2% compared to the same period of the previous 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. the operating margin decreased 187 bps to 39.5%. Excluding the impact of the change in accounting and fx estimate, operating margin would be relatively unchanged.

The company’s cash flows continued to be strong in the last quarter. cash from operations grew 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 cash and investments of $104.8 billion and debt of $49.8 billion.

despite the weakness in pc, the company’s other segments continue to grow. the intelligent cloud grew 20% year over year to $20.9 billion and the productivity and business process segment grew 13% year over year to $16.6 billion.

The company also made an accounting change to the useful life of server and network equipment assets from four to six years, which will extend the company’s depreciation expense.

amy hood said on the earnings call: “first, beginning in fiscal year 23, we are extending the depreciable useful life of the servers and network equipment in our cloud infrastructure from 4 to 6 years, which will apply to asset balances on our balance sheet as of June 30, 2022, as well as future asset purchases.

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

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meta: does not meet the expectations of q3

The market doesn’t need a perfect quarter for Q2 given the many hurdles tech companies face. what the market needs is a signal that a company may have bottomed out and is able to drive growth (even if only minimal) from Q2 to Q3.

In the second quarter, meta revenues fell for the first time in history. this was to be expected. however, what was not expected was the downward guidance for the next quarter. the company guided from $26 billion to $28.5 billion, or a 6% year-over-year decrease at the guidance midpoint. The guide takes into account the weak demand for advertising that the company experienced in the last quarter and also the 6% exchange rate headwinds. investors expected a return to growth in the next quarter.

The company slightly exceeded the data of 1.97 billion compared to the 1.96 billion expected. monthly users were 2.93 billion, slightly below expectations of 2.94 billion.

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Operating expenses increased 22% year over year to $20.4 billion. this led to the drop in the operating margin to 29% in the last quarter compared to 43% in the same period last year. it also led to the 36% year-over-year drop in net income to $6.69 billion. the eps reached $2.46 compared to $3.61 in the second quarter of 2021.

The company is looking to further reduce operating expenses for the year to $85 billion to $88 billion from last quarter’s guidance of $87 billion to $92 million and the previous estimate of $90 billion to $95 billion.

We discuss why the metagame is likely to continue to face headwinds in a detailed webinar here:

apple: good results despite challenges

apple posted solid results despite a challenging macroeconomic environment, a strong US dollar and supply chain issues. revenue grew 1.9% year-over-year to $83 billion, in line with analyst estimates. reported eps of $1.20, which beat estimates by $0.04 (4% exceedance).

Products segment revenue decreased marginally 0.9% year over year to $63.4 billion and Services segment revenue grew 12% year over year to $19.6 billion. the company’s installed base of active devices reached an all-time high. had more than 860 million paid subscriptions, 160 million more than last year.

The company did not give exact revenue guidance for the coming quarter. Tim Cook, the company’s chief executive officer, said on the earnings call: “We’re going to accelerate revenue in the September quarter compared to the June quarter and slow it down on the services side.”

The company’s gross margin was 43.26%, compared to 43.75% in the prior quarter and 43.29% in the prior year period. 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 in the same period last year. it beat analysts’ eps estimates by $0.04.

The company had cash and marketable securities of $179 billion and debt of $120 billion. the company reported strong operating cash flows of $23 billion (28% of revenues). the company returned more than $28 billion to shareholders last quarter in the form of dividends and share buybacks.

royston roche, equity analyst at i/o fund, contributed to this article.

please note: the i/o fund conducts research and draws conclusions for the company’s portfolio. we then share that information with our readers and offer real-time trade notifications. this is not a guarantee of a stock’s performance and is not financial advice. consult your personal financial advisor before purchasing any stock in the companies mentioned in this review. beth kindig and i/o fund own alphabet and microsoft at the time of this writing.

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