Microsoft Issues Q3 Earnings Warning on Virus Concerns

Microsoft Issues Q3 Earnings Warning on Virus Concerns
February 28, 2020


Microsoft (Nasdaq: MSFT) announced on Thursday that it might miss the quarterly revenue outlook issued earlier for the personal computing segment, which includes Windows, tablets and Surface laptops. The company clarified that the likelihood of missing the earlier guidance was because of the coronavirus issue that has affected manufacturing in China. The announcement has come amidst accelerated sell-off in the market due to worries about the virus. Notably, shares of Microsoft had lost 4.7% before the warning was issued. Following the announcement, Microsoft lost $11.99 or 7.05% to close at $158.18.

While issuing the fiscal 2020 third-quarter earnings warning, the Redmond, Washington-based company has stated that its most-watched, rapidly expanding cloud computing business is not expected to be affected in any manner.

Windows OEM segment generates revenue from the sales of Windows licenses to gadget manufacturers, in addition to licenses for non-commercial and commercial PCs. While revenue from licenses for commercial Windows-based gadgets accounts for 40% of Windows revenue, revenue from licenses for non-commercial devices represent roughly 20% of total Windows revenue.

Microsoft had earlier stated that it anticipates earnings of between $10.75 per share and $11.15 billion from the Windows OEM segment. The company is yet to issue an updated view. Other guidance for the 3Q 2020 still stands, the company pointed out.

During the fiscal 2020 second-quarter, More Personal Computing Segment generated roughly 36% of total revenue and approximately 30% of operating income. The segment includes PC accessories, search, gaming, and MSN advertising, in addition to Windows and Surface.

In contrast to Apple, Microsoft had minimal sales in China. Specifically, the Chinese market represents less than 2% of Microsoft’s overall revenue. Even though there is a considerable usage of Microsoft’s Windows and Office products in China, the software package is usually pirated.

In its statement, Microsoft pointed out that its supply chain is taking more time to return to normalcy due to coronavirus issue. “Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of the fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”

About a week ago, Apple slashed its sales outlook because of the public health issues from the Covid-19 (coronavirus). Similarly, earlier this week, HP, which is in the list of top sellers of Windows PCs, stated that enterprises might postpone their plans to update Windows 10 software.

Dan Ives, a managing director at Wedbush Securities, opined that the cautionary statement issued by Microsoft and Apple, two renowned publicly listed enterprises, highlighted the susceptibility of technology supply chains in the South Asian country. Considering the risks, many tech firms operating large factories in China have started to move to other low-cost manufacturing countries such as Vietnam.

Ives opined that the warning from Microsoft could raise concerns about the supply chain of other companies. “When bellwethers like Microsoft come out and talk about the supply chain and how it will negatively impact PC demand, it fans the flames of some of the worries out there for the broader supply chain.”

The profit warning is anticipated to keep the stock bearish in the short-term.

The historical price chart indicates that the stock is declining after facing resistance at 180 levels. The next support is anticipated only near 140. Additionally, the ultimate oscillator is also making new lows. Therefore, we are expecting the stock to remain in a downtrend in the near-term.

msft - techncial analysis - 28th Feb 2020

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Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be

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