Earnings Results: Microsoft beats on earnings after raising prices for Office; stock jumps after strong forecast

Microsoft shares dipped more than 2% in after-hours trading immediately following the release of the results, but then bounced back to slight gains in choppy action before getting a big boost from a forecast delivered during a later conference call. Shares finished up 4.5% in the extended session. The stock had closed with a 3.7% decrease at $270.22.

Microsoft’s software business increased sales by more than $2 billion after the company substantially raised prices across the board on its popular Office 365 suite of products for the first time since moving to a cloud offering for it a decade ago. Sales in the “Productivity and Business Solutions” segment increased to $15.79 billion from $13.55 billion a year ago, while analysts on average were expecting $15.75 billion, according to FactSet.

The Office 365 price increase, announced last year, was supposed to go into effect at the beginning of March, but the company delayed the price increase for some customers. Jefferies analysts noted that customers may have jumped to lock in the lower prices by signing new deals before the price increase, which would be a boon for the third quarter, but could weigh on the company’s forecast for the rest of the year.

“Office may have benefited from a pull-forward given the price increases went into effect March 1, as some customers may have renewed before the increase. This strength may be a potential risk for Office upside the rest of this calendar year,” the analysts wrote in an April 18 note, while maintaining a buy rating and $400 price target.

Microsoft Chief Financial Officer Amy Hood guided for fiscal fourth-quarter software sales of $16.65 billion to $16.9 billion, while analysts were estimating $16.68 billion, suggesting any weakness would not be felt in the current quarter.

Microsoft’s most lucrative segment is “Intelligent Cloud,” which includes its Azure cloud-computing product as well as sales of servers and other on-premises products. The cloud segment reported revenue of $19.05 billion, up from $15.19 billion a year ago, while analysts on average were predicting $18.89 billion. Microsoft said Azure revenue increased by 46%; the company does not break out revenue specifically for Azure, even though rivals Amazon.com Inc. AMZN, -4.58% and Alphabet Inc. GOOGL, -3.59% GOOG, -3.04% state sales for their competitive platforms, Amazon Web Services and Google Cloud, respectively.

Microsoft’s “More Personal Computing” segment grew to sales of $14.52 billion from $13.04 billion a year ago, despite fears that a pandemic boom in personal-computer sales has come to an end. Analysts had predicted sales of $14.3 billion on average, and forecasts for the fourth quarter suggest slower growth in the segment is on the horizon.

Hood’s forecast called for fourth-quarter revenue of $52.4 billion to $53.2 billion, while analysts were expecting $52.75 billion. After the forecast was delivered, shares jumped, as they did three months ago.

“In our largest quarter of the year we expect our differentiated market position, customer demand across the solution portfolio, and consistent execution to drive another strong quarter of revenue growth,” Hood said, while cautioning that Microsoft — like other large companies — is facing financial issues stemming from Russia’s invasion of Ukraine and COVID-19-related factory shutdowns in China.

“We anticipate the war in Ukraine to continue to  impact our business in Q4, with a roughly $110 million impact on revenue and minimal impact on operating expenses,” she said. “Next, we have taken into account the current impact of shutdowns in China in our outlook; however, extended production shutdowns that reach into May would further negatively impact our outlook across Windows OEM, Surface and Xbox hardware.”

Microsoft shares have fallen 19.7% so far this year, as the S&P 500 index SPX, -2.81% has declined 9.9%. The decline has Microsoft in danger of falling lower than a $2 billion market capitalization for the first time since June 2021, according to FactSet data; at the closing price, Microsoft had a valuation of about $2.03 trillion.