Microsoft, Google Roughed Up on Earnings; Juniper Raises

Technology investors and market participants have been waiting with anxiety to see what earnings season would bring for results in the third quarter. So far, it's not terrible. The early returns aren’t great, but the market seems to be holding up and some data shows that the feared technology recession doesn’t yet have a lot of teeth.

Google’s earnings came in light, with the company missing sales and earnings expectations set by analysts, hit by a decline in advertising revenue. Microsoft slightly beat expectations, but growth in its Azure cloud platform disappointed and the company lowered its expectations for next year.

In other news in the cloud and networking space:

• Juniper Networks came in with strong earnings. Revenue increased 19% year-over-year (y/y) and the company increased its outlook for 7%+ growth in 2023.
• F5 Networks delivered results revenue that was $8 million above Wall Street expectations (3% growth), while earnings had a 13% y/y decline but beat expectations.

This year, the stock market has projected a technology growth slowdown as stocks have been hit by rapidly rising interest rates. Technology and growth stocks are historically more sensitive to rising interest rates.

But overall, this week the market responded well to the reports both good and bad. The tech-heavy Nasdaq Composite index was only down .44% in Wednesday morning trading after the gloomy Google and Microsoft news, with the S&P 500 slightly in the green.

Google and Microsoft Sink, but Cloud Leads Growth

Google and Microsoft underlined the concerns about technology markets as both stocks got hit for 5% or worse on weaker growth.

Don’t worry, neither Google nor Microsoft is going out of business. Google’s parent company Alphabet reported $13.9 billion in profit on $69.1 billion in sales. But ad sales grew only 4% on a y/y basis. Alphabet shares were down about 7% in early morning trading.

Still, the company emphasized that growth in cloud was still solid, coming in at 38% y/y. Segment growth included: Google Search and other, $39.54B (up 4.3%); YouTube, $7.07B (down 1.9%); Google Network, $7.87B (down 1.6%); other, $6.9B (up 2.1%); Google Cloud, $6.9B (up 37.6%).

Microsoft reported better-than-expected results for the September quarter, but provided December quarter guidance below analyst estimates. Shares were down 6% in the early going. The software leader posted revenue of $50.1 billion, up 11% y/y.

Growth in the company’s “intelligent cloud” segment, which includes Azure, was $20.3 billion, up 20%. That was slightly below analyst estimates. Investors might not want to be too sad about earnings – the company is still wildly profitable. Operating income was $21.5 billion and increased 6% (up 15% in constant currency), or $2.35 in diluted earnings per share.

Overall Technology Markets Weak

The technology markets, which have received the brunt of the market selloff this year in the rising interest environment, are likely to continue to be weak for at least the next couple of quarters, as rising interest rates take their toll on the larger economy. A pullback in consumer spending and some announcements of technology layoffs show signs that enterprises and technology companies are being more cautious.

For example, Microsoft cited a slump in the PC market, which has seen sales collapse following the growth during the pandemic. According to Gartner, worldwide PC shipments declined 19.5% from 84.1 million units in Q3 2021 to 68 million in Q3 2022, falling back to pre-pandemic levels.

However, other areas of enterprise spending -- including cloud -- appear to have held up pretty well, despite some slowdown in high growth rates. Gartner still forecasts worldwide IT spending to grow at least 5% in 2023. Software is expected to grow 11%.

Digital transformation initiatives, seen as long-term and strategic by many boards, are likely to continue. A July 2022 Gartner survey of more than 200 CFOs found that 69% plan to increase their spend on digital technologies, while the 2023 Gartner CIO and Technology Executive Survey found that CIOs are being tasked with accelerating time to value on digital investments.

More large technology companies will report this week, including Meta (Facebook) and Apple.