Microsoft and Google income takes a hit amid economic downturn

Microsoft was boosted by continued growth in its cloud unit, while Google missed revenue and EPS expectations for the third quarter in a row.

Microsoft and Google’s parent company Alphabet have seen a drop in their net income this quarter, while Spotify’s profits were squeezed by slow ad growth.

Microsoft revenue for its 2023 first quarter hit $50.1bn with a year-on-year growth of 11pc. However, the company’s net income decreased by 14pc to $17.6bn.

Similar to the previous quarter, The software giant was boosted by its cloud revenue, which grew to $25.7bn, a 24pc increase compared to last year. This includes $20.3bn from its Intelligent Cloud division, which grew by 20pc. Azure and other cloud services saw a growth of 35pc.

In January, high demand for Azure and Teams saw Microsoft receive a revenue boost, as people continued to shift to remote and hybrid work.

Amy Hood, chief financial officer of Microsoft, said the company continues to see healthy demand across its commercial businesses, with the latest quarter having “solid bookings”.

Microsoft CEO and chair Satya Nadella also expressed a positive outlook and said digital technology is “the ultimate tailwind” in a world facing “increasing headwinds”.

“In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way,” Nadella said.

But the company is not immune to issues facing the global economy. In an interview with Bloomberg, Hood said Microsoft is paying more to deliver cloud-computing services to customers in Europe, as rising energy costs impact profitability. Hood added that the company expects to pay $800m in extra energy costs this fiscal year.

The boost to cloud services also benefitted Xbox. Nadella said more than 20m people have streamed games using Xbox Cloud Gaming, which is double the 10M figure that Microsoft shared in April. Xbox hardware revenue also saw a growth of 13pc this quarter.

LinkedIn revenue saw 19pc year-on-year growth, while Microsoft’s search and news advertising revenue grew by 16pc, excluding traffic acquisition costs.

Advertising is something that Microsoft will be focusing on with Netflix, as it was chosen to help the streaming company offer a cheaper subscription option that shows ads to users.

Alphabet’s third quarter

Google’s parent company, meanwhile, fell short in many areas compared to analyst expectations, impacting its stock price.

The company’s revenue for its third quarter was $69.09bn, which is higher than $65.1bn in the same quarter last year. However, this was lower than the $70.58bn expected, according to Refinitiv estimates.

Alphabet’s net income took a sharp hit, earning $13.9bn this quarter, compared to $18.9bn last year. The company’s earnings per share for this quarter was $1.06, lower than the $1.25 expected.

This marks the third quarter in a row that the company has missed expectations in terms of revenue and earnings per share.

The tech giant’s advertising sales reached $54.5bn, which is a slightly higher than last year’s $53.1bn but still fell short of analyst estimates.

The global advertising crunch continues to impact YouTube significantly, as its ad revenue dropped by 1.9pc year-on-year to $7.07bn. This was expected to grow by 3pc, reaching $7.42bn. This marks YouTube’s slowest ad growth in at least two years.

This is the first time that YouTube’s ad revenue has regressed since Alphabet began disclosing its results in 2019, AP reports.

Issues in advertising have been hitting various companies this year. In its latest earnings report, Spotify said its margins were hit due to “slower than forecast advertising growth given the challenging macro environment”.

Google Cloud exceeded expectations with revenue of $6.9bn this quarter, but its losses widened to $699m compared to $644m in the same quarter last year.

Alphabet and Google CEO Sundar Pichai said the tech group is sharpening its focus on a “clear set of product and business priorities”.

“Product announcements we’ve made in just the past month alone have shown that very clearly, including significant improvements to both Search and Cloud, powered by AI, and new ways to monetise YouTube Shorts,” Pichai said.

“We are focused on both investing responsibly for the long term and being responsive to the economic environment.”

The tech giant’s headcount from this quarter is 186,779, up from 150,028 year-on-year. However, the company said that its headcount growth will slow to less than half, compared to the rise seen in the third quarter, CNBC reports.

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