Microsoft's Search Revenue Downtrend Signals Trouble For Google Too

Microsoft Corporation MSFT beat earnings estimates in the first quarter, clocking a revenue growth of 12% to $37.2 billion. Revenue grew across the board except for search and advertising, which fell 10% year-over-year on an absolute basis and 11% YoY on a constant currency basis.

What Happened: Revenue from search and advertising was the only negative aspect of Microsoft's latest quarter.

The 10% decline in search and adverting sales, excluding traffic acquisition costs (ex-tac), in the December quarter followed an 18% decline in the June quarter, indicating a downtrend. 

Since the pandemic outbreak, companies and customers have withheld their advertising budgets, the impact of which is evident in major tech players that dominate the search-based advertising revenue market.

Why It Matters: The downtrend in search-based advertising should be a cause of worry for Alphabet Inc GOOG GOOGL investors. There is a strong correlation between Microsoft and Alphabet-owned Google's search revenues, CNBC reports.

Though Google's search engine is more widely used than Microsoft's Bing, historical trends show that Google's search revenue decline follows Microsoft's decline.

When Microsoft reported an 18% decline in June quarter, Alphabet's June quarter revenue from search fell 10% to $21.32 billion.

In its latest conference call, Microsoft CFO Amy Hood gave bleak guidance for search and advertising sales for the December quarter.

"In Search ex-TAC, we expect revenue to decline in the mid to high-single-digit range," Hood said.

The expected decline in the range of 7% to 9% for December does not bode well for Alphabet's investors.

Alphabet will report September quarter earnings on Thursday after the market close. Investors will be closely watching the revenue and guidance figure from search-based advertising.