Financial Performance

Microsoft Stock Falls as Cloud Growth Slows

The shares had their worst day since January 2015 after the company reported revenue from cloud computing did not offset weak PC and phone sales.
Matthew HellerApril 22, 2016

Microsoft shares on Friday dropped 7.2%, their worst day in 15 months, as the software giant’s third-quarter earnings missed estimates and faltering growth in cloud computing spooked investors.

Microsoft said its Intelligent Cloud segment, which includes its lineup of Azure public cloud services, posted a revenue increase of 3% to $6.1 billion. But in the previous quarter, the same segment grew 5%.

The Windows maker earned an adjusted $0.62 per share, slightly worse than the $0.64 analysts had expected. It generated total adjusted revenue of $22.1 billion, largely in line with analyst estimates.

“We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity resulting in almost 70% year-over-year growth in our commercial cloud run rate,” Kevin Turner, chief operating officer at Microsoft, said in a news release.

CFO Amy Hood said the company’s tax rate was higher than expected and contributed to the company’s lower-than-expected net income.

But investors reacted negatively, driving Microsoft shares down to $51.78 from Thursday’s close of $55.78. “Microsoft’s cloud business didn’t grow quite fast enough during its last quarter to keep investors happy,” The New York Times said.

On the computing side, the PC sales decline continued to hurt Microsoft, with Windows OEM revenue declining by 2% year over year. Microsoft’s tablet device, Surface, showed a revenue increase of 61% in constant currency, driven by Surface Pro 4 and Surface Book, but phone revenue declined by 46%.

“To some extent, Microsoft’s success in the cloud has overshadowed its struggles in the mobile market,” the NYT said. “The company tried for a time to compete in handset sales against Apple and others by acquiring the mobile business of Nokia, but it has greatly scaled back the number of phones it sells and laid off many of the employees in that business after weak sales.”

According to Hood, the higher tax rate reflected an unexpected shift in Microsoft sales to countries with higher tax rates, along with a shift to revenue from cloud computing, which is taxed at a higher rate than traditional software licenses.