Software earnings are expected to be healthy, but show some signs of slowing down
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As software leaders such as Microsoft (NASDAQ:MSFT) and ServiceNow (NYSE:NOW) prepare to report their quarterly results later this month, the sector is seen as solid, but also heading into a state of uncertainty for the rest of the year.
That's the assessment of Mizuho Securities analyst Gregg Moskowitz, who on Tuesday said that while the software industry remains fundamentally healthy, there have been "indications or moderating demand" among customers. As such, Moskowitz gave a haircut to his revenue estimates for a handful of software companies for the rest of this year.
Moskowitz said that factors impacting the performance of the software sector include rising inflation, ongoing supply chain constraints, effects of currency exchange rates and the ongoing war between Russia and Ukraine.
"We have also heard more cautionary reports that include instances of elongated sales cycles and greater [price] discounting," Moskowitz said.
A look at software revenue estimates shows just why questions are growing about how the sector is set up for the current earnings season and the months ahead.
Moskowitz said that he is estimating that software companies' revenue will, in general, grow about 4% over the first quarter of the year. However, Moskowitz said some software leaders will likely see "a meaningful currency headwind" due to how much the U.S. dollar appreciated and grown stronger during the past three months. As a result, Moskowitz said he expects revenue on the whole to grow, "but not to a meaningful degree on average.
For Microsoft (MSFT), which is scheduled to report its fiscal fourth-quarter results on July 27, Moskowitz trimmed his estimates to a profit of $2.29 a share, on revenue of $52.28B, from his previous forecast of $2.30 a share on sales of $52.45B. Moskowitz also shaved his full-year Microsoft (MSFT) revenue forecast to $198.69B from $198.86B, and cut his price target on the company's stock to $340 a share from $350.
Moskowitz noted that since Microsoft (MSFT) "uncharacteristically lowered" its revenue outlook earlier in the recent quarter, "many are skittish on Microsoft, and we know the reasons why." Still, Moskowitz said that checks on Microsoft's (MSFT) Azure cloud business were "better than we had expected," and didn't show signs of customers pulling back from their purchase plans. 
"Microsoft's growth opportunities over the medium-term and beyond are greater than many realize," Moskowitz said, adding that the company "is positioning for materially greater success in [the] cloud."
Along with Microsoft (MSFT), ServiceNow (NOW) is also on tap to deliver its second-quarter results on July 27. Moskowitz said that during the recently completed quarter, there was evidence that ServiceNow (NOW) experienced some slower business activity, longer sales lead cycles and a reduction in the size of some of its deals. But, he added that there were also reports of the company seeing "some good large-deal activity" as well.
Moskowitz said he expects ServiceNow (NOW) to report $1.62B in subscription billings in the quarter, which would be a 22% increase over the same period a year ago, and that the company should see more growth over the next few years as more businesses implement the company's workflow automation systems.
However, due to the broader issues hovering over the software market, Moskowitz trimmed his quarterly sales outlook on ServiceNow (NOW) to $1.66B from $1.67B, and also lowered his full-year revenue estimate to $6.96B from $7.03B.
IBM (IBM), which has put more of its emphasis on software and cloud-based services, provided an example of how the strength of the U.S. can impact business, as it said on Monday that currency exchange rates will put some pressure on its free cash flow this year. Investors responded by sending IBM's (IBM) shares down more than 6% on Tuesday.