Microsoft and Alphabet signal Q2 could be lower.

Big Tech earnings were off to a strong start on Tuesday as Microsoft and Google reported steady revenue growth and margins unchanged from recent macro factors. The strong margins are particularly welcome as many companies have lost operating margins and cash flow. Meanwhile, Microsoft posted good guidance for the year with free cash flow of $17.8 billion and net profit of $16.7 billion. Similarly, Google reported strong free cash flow of $12.6 billion and net profit of $16 billion in the most recent quarter.

The same wasn’t the case for the meta, which mainly stumbled on its Q3 guidance. The company reported the first decline in revenue in company history and missed guidance for the next quarter due to FX headaches. Analysts’ expectations for Q3 were $30.4 billion, or 5% growth. Instead, the company generated a 6% headwind at current exchange rates in the middle of guidance, for $26 billion to $28.5 billion, or a 6% YoY decline.

Alphabet: Searchable.

The company reported revenue of $69.7 billion, up 13 percent, or 16 percent in constant currency. Operating margin was flat year-over-year, which is a win. Operating expenses rose 24 percent, but operating margin was 28 percent from the prior quarter on operating income of $19.58 billion.

Net margin was slightly weaker than last quarter at $16 billion in 2021. The company has free cash flow of $12.6 billion. The company has $125 billion in cash and marketable securities. The company reported EPS of $1.21 compared to $1.36 in the same period last year.

Search was steady, with current location growth of 13.5% to $40 billion, and that’s a relief that all ad spending hasn’t stopped. Search was strong last quarter, up 24 percent to $40 billion, and was flat sequentially in terms of total dollar volume.

The results of Google’s large R&D department and advances in AI, the resilience of search cannot be understated in the current environment. We’re getting a glimpse of what’s to come for Google in terms of its ad dominance.

Expectations were that YouTube would weigh in on the report, but YouTube saw a slight growth of 5% year-over-year. The company insists YouTube’s growth is low because of strong comps. Strong comps were touched on several times, such as: “The modest year-over-year growth rate primarily reflects an exceptionally strong performance in the second quarter of 2021.

Google Cloud’s growth slowed to 35.6 percent from 43.8 percent in the previous quarter. This means Google Cloud is growing slower than Azure on a smaller revenue base. This is something to watch in the future.

Microsoft: Double-digit guidance for FY2023

While Microsoft’s management gave strong guidance for Q1 FY2023 and 2023, many tech companies are holding back on giving guidance. For Q1 FY2023, management provided 10% guidance for product lines for the next quarter (this includes FX headwinds) and also guidance for fiscal year 2023, which ends in June: “We continue to expect growth in both fixed income and operating income. Currency and the US dollar. Revenue growth was driven by the continued momentum of our business and a focus on equity gains in our portfolio.

Revenue grew 12% YoY to $51.9 billion (missing Wall Street analysts’ estimates by 0.94%) and EPS came in at $2.23 (missing estimates by 2.9%). The strong US dollar negatively impacted revenue at $595 million and EPS at $0.04. Microsoft Cloud revenue grew 28% YoY to $25 billion. The company’s results are good considering various macro uncertainties, China’s lockdown and the strong US dollar. 2022 revenue grew 18% to $198.3 billion and net income increased 19% YoY to $72.7 billion.

The company’s total revenue grew 10% YoY to $35.4 billion. Gross margin declined by 147 bps to 68.2% compared to the same period last year. Excluding the impact of the change in the accounting estimate, the gross margin remained relatively unchanged.

Operating income grew 8% YoY to $20.5 billion. Operating margin declined by 187 bps to 39.5%. Excluding the impact of changes in accounting and FX, the operating margin will be relatively unchanged.

The company’s cash flow continued to be strong in the latest quarter. Cash from operations grew 8% YoY to $24.6 billion (47% of revenue) and free cash flow grew 9% YoY 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 PCs, the company’s other divisions continued to grow. Intelligent Cloud grew 20% YoY to $20.9 billion and the Productivity and Business Processes segment grew 13% YoY to $16.6 billion.

The company has made accounting changes to the useful lives of server and network equipment over a period of four to six years, which will extend the company’s depreciation expense.

Amy Hood said on the earnings call, “First, in Effective at the beginning of FY23, we are extending the depreciable useful life of server and network equipment assets in our cloud infrastructure from 4 to 6 years, applicable to the asset balance on the 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 fiscal ’23 operating income to be positively impacted by approximately $3.7 billion in the fiscal year and approximately $1.1 billion in the first quarter.

Meta: Q3 missed expectations.

Given the many headwinds tech companies are facing, the market doesn’t need a perfect quarter for Q2. What the market needs is a sign that a company can bottom out and manage growth (albeit modest) from Q2-Q3.

In Q2, Meta’s revenue fell for the first time in history. This was to be expected. However, the unexpected was lower guidance for the next quarter. The company posted mid-point guidance of $26 billion to $28.5 billion, or a 6 percent YoY decline. The guidance takes into account the weak advertising demand the company experienced in the latest quarter, as well as a 6% foreign exchange headwind. The investors were expecting a return of growth in the next quarter.

The company took a slight hit on DAUs with 1.97 billion compared to 1.96 billion. Monthly users of 2.93 billion slightly missed expectations of 2.94 billion.

Operating expenses rose 22 percent YoY to $20.4 billion. This caused the operating margin to shrink to 29 percent compared to 43 percent in the same period last year. It led to a 36% YoY decline in net income to $6.69 billion. EPS came in at $2.46, compared to $3.61 in Q2 2021.

The company is looking to lower 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 meta continues to face headwinds in an insightful webinar:

Apple: Strong results despite challenges

Apple posted strong results despite a challenging macro environment, a strong US dollar and supply chain issues. Revenue rose 1.9% YoY to $83 billion, which was in line with analyst estimates. It reported EPS of $1.20, beating estimates by $0.04 (a 4% beat).

Product segment revenue decreased slightly by 0.9% YoY to $63.4 billion, while Service segment revenue increased 12% YoY to $19.6 billion. The company’s installed base of active devices is at an all-time high. It had more than 860 million paid subscriptions, up 160 million from last year.

The company did not provide an exact revenue guidance for the next quarter. The company’s CEO Tim Cook said on the earnings call We have accelerated revenues in the September quarter compared to the June quarter and a decline in the services side.

The company’s gross margin was 43.26 percent, compared to 43.75 percent in the previous quarter and 43.29 percent in the same period last year. It was 42% to 43% above management leadership.

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 assets of $179 billion and debt of $120 billion. The company reported strong operating income of $23 billion (28% of revenue). The company returned more than $28 billion to shareholders through dividends and buybacks last quarter.

Royston Roche, equity analyst at I/O Fund, contributed to this article.

Please note: I/O Fund conducts research and provides conclusions for the company’s portfolio. We then share the information with our readers and provide real-time commercials. This is not a guarantee of stock performance and is not financial advice. Please consult your personal financial advisor before purchasing any shares in the companies mentioned in this analysis. Beth Kindig and I/O Fund, while writing their own articles on Alphabet and Microsoft.

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