Microsoft 2Q Results Bolstered by Cloud Strength

Microsoft Corp. today announced the following results for the quarter ended December 31, 2022, as compared to the corresponding period of last fiscal year:

  • Revenue was $52.7 billion and increased 2%
  • Operating income was $20.4 billion GAAP and $21.6 billion non-GAAP, and decreased 8% and 3%, respectively
  • Net income was $16.4 billion GAAP and $17.4 billion non-GAAP, and decreased 12% and 7%, respectively
  • Diluted earnings per share was $2.20 GAAP and $2.32 non-GAAP, and decreased 11% and 6%, respectively

“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform,” said Satya Nadella, chairman and chief executive officer of Microsoft. “We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

“We are focused on operational excellence as we continue to invest to drive growth. Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year-over-year as our commercial offerings continue to drive value for our customers,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.

Three Months Ended December 31,
($ in millions, except per share amounts)RevenueOperating IncomeNet IncomeDiluted Earnings per Share
2021 As Reported (GAAP)$51,728$22,247$18,765$2.48
2022 As Reported (GAAP)$52,747$20,399$16,425$2.20
Severance, hardware-related impairment, and lease consolidation costs1,1719460.12
2022 As Adjusted$52,747$21,570$17,371$2.32
Percentage Change Y/Y (GAAP)2%(8)%(12)%(11)%
Percentage Change Y/Y Constant Currency7%0%(4)%(3)%
Percentage Change Y/Y (As Adjusted)2%(3)%(7)%(6)%
Percentage Change Y/Y (As Adjusted) Constant Currency7%6%1%2%

Business Highlights

Revenue in Productivity and Business Processes was $17.0 billion and increased 7% (up 13% in constant currency), with the following business highlights:

  • Office Commercial products and cloud services revenue increased 7% (up 14%in constant currency) driven by Office 365 Commercial revenue growth of 11% (up 18% in constant currency)
  • Office Consumer products and cloud services revenue decreased 2% (up 3% in constant currency) and Microsoft 365 Consumer subscribers grew to 63.2 million
  • LinkedIn revenue increased 10% (up 14% in constant currency)
  • Dynamics products and cloud services revenue increased 13% (up 20% in constant currency) driven by Dynamics 365 revenue growth of 21% (up 29% in constant currency)

Revenue in Intelligent Cloud was $21.5 billion and increased 18% (up 24% in constant currency), with the following business highlights:

  • Server products and cloud services revenue increased 20% (up 26% in constant currency) driven by Azure and other cloud services revenue growth of 31% (up 38% in constant currency)

Revenue in More Personal Computing was $14.2 billion and decreased 19% (down 16% in constant currency), with the following business highlights:

  • Windows OEM revenue decreased 39%
  • Windows Commercial products and cloud services revenue decreased 3% (up 3% in constant currency)
  • Xbox content and services revenue decreased 12% (down 8% in constant currency)
  • Search and news advertising revenue excluding traffic acquisition costs increased 10% (up 15% in constant currency)
  • Devices revenue decreased 39% (down 34% in constant currency)

Microsoft returned $9.7 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2023, a decrease of 11% compared to the second quarter of fiscal year 2022.

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.

Quarterly Highlights, Product Releases, and Enhancements

Every quarter Microsoft delivers hundreds of products, either as new releases, services, or enhancements to current products and services. These releases are a result of significant research and development investments, made over multiple years, designed to help customers be more productive and secure and to deliver differentiated value across the cloud and the edge.

Here are the major product releases and other highlights for the quarter, organized by product categories, to help illustrate how we are accelerating innovation across our businesses while expanding our market opportunities.

Environmental, Social, and Governance (ESG)

To better execute on Microsoft’s mission, we focus our Environmental, Social, and Governance (ESG) efforts where we can have the most positive impact. To learn more about our latest initiatives and priorities, please visit our investor relations ESG website.

Webcast Details

Satya Nadella, chairman and chief executive officer, Amy Hood, executive vice president and chief financial officer, Alice Jolla, chief accounting officer, Keith Dolliver, deputy general counsel, and Brett Iversen, vice president of investor relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at https://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on January 24, 2024.

Non-GAAP Definition

Q2 charge. In the second quarter of fiscal year 2023, Microsoft recorded costs related to decisions announced on January 18th, including employee severance expenses of $800 million, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities.

Microsoft has provided non-GAAP financial measures related to the impact of these strategic reprioritization actions to aid investors in better understanding our performance. Microsoft believes these non-GAAP measures assist investors by providing additional insight into its operational performance and help clarify trends affecting its business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Constant Currency

Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-GAAP financial information to aid investors in better understanding our performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Financial Performance Constant Currency Reconciliation

Three Months Ended December 31,
($ in millions, except per share amounts)RevenueOperating IncomeNet IncomeDiluted Earnings per Share
2021 As Reported (GAAP)$51,728$22,247$18,765$2.48
2022 As Reported (GAAP)$52,747$20,399$16,425$2.20
2022 As Adjusted$52,747$21,570$17,371$2.32
Percentage Change Y/Y (GAAP)2%(8)%(12)%(11)%
Percentage Change Y/Y (As Adjusted)2%(3)%(7)%(6)%
Constant Currency Impact$(2,645)$(1,931)$(1,563)$(0.21)
Percentage Change Y/Y Constant Currency7%0%(4)%(3)%
Percentage Change Y/Y (As Adjusted) Constant Currency7%6%1%2%

Segment Revenue Constant Currency Reconciliation

Three Months Ended December 31,
($ in millions)Productivity and Business ProcessesIntelligent CloudMore Personal Computing
2021 As Reported (GAAP)$15,936$18,262$17,530
2022 As Reported (GAAP)$17,002$21,508$14,237
Percentage Change Y/Y (GAAP)7%18%(19)%
Constant Currency Impact$(1,002)$(1,078)$(565)
Percentage Change Y/Y Constant Currency13%24%(16)%

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Selected Product and Service Revenue Constant Currency Reconciliation

Three Months Ended December 31, 2022
Percentage Change Y/Y (GAAP)Constant Currency ImpactPercentage Change Y/Y Constant Currency
Microsoft Cloud revenue22%7%29%
Office Commercial products and cloud services7%7%14%
Office 365 Commercial11%7%18%
Office Consumer products and cloud services(2)%5%3%
LinkedIn10%4%14%
Dynamics products and cloud services13%7%20%
Dynamics 36521%8%29%
Server products and cloud services20%6%26%
Azure and other cloud services31%7%38%
Windows OEM(39)%0%(39)%
Windows Commercial products and cloud services(3)%6%3%
Xbox content and services(12)%4%(8)%
Search and news advertising excluding traffic acquisition costs10%5%15%
Devices(39)%5%(34)%

About Microsoft

Microsoft (Nasdaq “MSFT” @microsoft) enables digital transformation for the era of an intelligent cloud and an intelligent edge. Its mission is to empower every person and every organization on the planet to achieve more.

Forward-Looking Statements

Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as:

  • intense competition in all of our markets that may lead to lower revenue or operating margins;
  • increasing focus on cloud-based services presenting execution and competitive risks;
  • significant investments in products and services that may not achieve expected returns;
  • acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business;
  • impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;
  • cyberattacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;
  • disclosure and misuse of personal data that could cause liability and harm to our reputation;
  • the possibility that we may not be able to protect information stored in our products and services from use by others;
  • abuse of our advertising, professional, marketplace, or gaming platforms that may harm our reputation or user engagement;
  • the development of the internet of things presenting security, privacy, and execution risks;
  • issues about the use of artificial intelligence in our offerings that may result in competitive harm, legal liability, or reputational harm;
  • excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;
  • quality or supply problems;
  • government litigation and regulatory activity relating to competition rules that may limit how we design and market our products;
  • potential consequences under trade, anti-corruption, and other laws resulting from our global operations;
  • laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, fines, or reputational damage;
  • claims against us that may result in adverse outcomes in legal disputes;
  • uncertainties relating to our business with government customers;
  • additional tax liabilities;
  • the possibility that we may fail to protect our source code;
  • legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property;
  • claims that Microsoft has infringed the intellectual property rights of others;
  • damage to our reputation or our brands that may harm our business and operating results;
  • adverse economic or market conditions that may harm our business;
  • catastrophic events or geo-political conditions, such as the COVID-19 pandemic, that may disrupt our business;
  • exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange and
  • the dependence of our business on our ability to attract and retain talented employees.

/Public Release. This material from the originating organization/author(s) may be of a point-in-time nature, edited for clarity, style and length. The views and opinions expressed are those of the author(s).View in full here.