Microsoft Reports Soft Cloud Growth and Windows Licenses Lowering Guidance

Software giant Microsoft reported stronger than expected June 2022 quarterly earnings Tuesday, both revenue and earnings beat expectations. However, MSFT warned for the coming quarter which saw the stock slide around 7%. Microsoft Cloud segment saw another slowdown, it had been MSFT’s robust engine with 50% or more year-over-year sales growth. Azure and other cloud services saw sales slowdown to 35% in the latest quarter. The software giant was also hit by revenue from sales of Windows licenses to device makers dropped 15% year over year, steeper than any quarter since 2015

Microsoft Fiscal Fourth Quarter Earnings After Tuesday Close

$2’35 Beat EPS $2.30 Forecast and $50.12B Beat Revenue $49.61 Billion Forecast

Conference call: 5:30 p.m.

Microsoft Q1 23 Earnings

Highlights

  • Net income fell by 14% to $17.56 billion. Microsoft had a $3.3 billion tax benefit in the year-ago quarter.
  • EPS: $2.35 (exp $2.30)
  • Revenue: $50.12B (exp $49.61B)
  • Productivity Revenue: $16.47B (exp $16.11B)
  • Intelligent Cloud Revenue: $20.33B (exp $20.31B)
  • Commercial Cloud Revenue: $25.7B (exp $25.66B)
  • Gross margin 69.2% trailed StreetAccount consensus 69.8%.
  • Microsoft returned $10.9 billion to shareholders in the form of share repurchases and dividends in the first quarter of fiscal year 2022, an increase of 14% compared to the first quarter of fiscal year 2021.
  • $MSFT $233.85 -16.81 (-6.71%) After hours

For the first time, revenue in the quarter from the Microsoft Cloud metric, encompassing Azure, commercial Office 365 subscriptions, commercial parts of LinkedIn and Dynamics 365, exceeded 50% of overall company revenue.

Microsoft like other American multinational has been hit by the soaring US dollar, the strength of the U.S. currency means Microsoft’s sales abroad are less profitable on conversion.

Microsoft Cloud

  • Microsoft’s Intelligent Cloud business segment, which includes the Azure public cloud, as well as Windows Server, SQL Server, Nuance and Enterprise Services, generated $20.33 billion in quarterly revenue.
  • That’s up 20% and slightly less than the $20.36 billion consensus among analysts polled by StreetAccount.
  • Azure revenue grew 35% in the quarter, compared with 40% growth in the previous quarter.
  • Analysts polled by CNBC had expected 36.4% growth, while analysts surveyed by StreetAccount had been looking for 36.9% Azure growth.
  • Growth in Azure consumption continued to moderate, and higher energy costs in the quarter hurt the gross margin of Azure, Amy Hood, the company’s finance chief, said on the call.

Microsoft is the clear No. 2 provider of on-demand computing processing and storage behind market pioneer Amazon.com.

Productivity and Business Processes

  • Productivity and Business Processes segment that contains Microsoft 365 productivity software subscriptions (the company is in the midst of rebranding the bundle from Office 365), LinkedIn and Dynamics, posted $16.47 billion in revenue, up 9% and above the $16.13 billion StreetAccount consensus.
  • A majority of the Microsoft 365 bookings during the quarter came from E5, a higher-priced bundle, Hood said.

More Personal Computing

  • Revenue from the More Personal Computing segment totaled $13.33 billion, down slightly and higher than the $13.12 billion StreetAccount consensus. The segment includes Windows, as well as Xbox, Surface and advertising from the Bing search engine.
  • Revenue from sales of Windows licenses to device makers dropped 15% year over year, steeper than any quarter since 2015 and worse than the outlook Hood gave in July for a decline in the high single digits. MSFT said the PC market continued to deteriorate during the quarter.
  • Note that revenue from HoloLens augmented-reality devices will appear in the More Personal Computing segment instead of the Intelligent Cloud segment. Microsoft adjusted its forecast for the segments by about $100 million in connection with the change.
  • Microsoft went all in on the videogame sphere and is currently going through approvals for its $75 billion deal for Activision Blizzard Inc. On that note Britain’s antitrust regulator opened a probe into whether the takeover might reduce competition. The company said it still expects the deal to close by June 30 next year.

Outlook

For the fiscal second quarter, Hood said Azure growth should fall sequentially by about 5% in constant currency, to about 37%. She did not provide a growth rate in dollars, and the company doesn’t disclose Azure revenue in dollars. Analysts polled by StreetAccount had expected 39.4% Azure growth in constant currency.

Hood said on Tuesday that the materially weaker demand for PCs seen in September will continue to affect its consumer business. She called for a percentage decline in the high 30s for Windows revenue from device makers in the fiscal second quarter.

Microsoft announced plans to slow down its pace of hiring said it was cutting less than 1% of employees. Operating expense growth should moderate materially during the 2023 fiscal year as the company focuses on improving employee productivity, Hood said.

“In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way,” Nadella said in the company’s earnings statement.

Source: MSFT

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