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Microsoft Q2 2023 revenue up 2% YoY at $52.7B, and net income is down 12% YoY at $16.4B

Microsoft announced its fiscal year 2023 (July 2022 – June 2023) second quarter (October-December 2022) results for the fiscal year ending December 31, 2022, after the U.S. stock market closed on Tuesday, Jan. 25, 2012. According to the report, Microsoft’s revenue for the second quarter was $52.7 billion (currently about RMB 357.306 billion), up 2% year-over-year; net income was $16.4 billion (currently about RMB 111.192 billion), down 12% year-over-year; and diluted earnings per share were $2.2, down 11% year-over-year. Microsoft shares fell more than 1 percent in after-hours trading following the release of the results.

Microsoft

Image source Pixabay

Here are the highlights of Microsoft’s fiscal second-quarter results.

— Revenue was $52.7 billion, up 2 percent from $51.7 billion a year ago, but missed analysts’ average estimate of $52.94 billion.

— Net income was $16.4 billion, down 12 percent from $18.8 billion a year ago.

— Diluted earnings per share of $2.20, down 11 percent from $2.48 a year ago and below the average analyst estimate of $2.29.

— Operating profit of $20.4 billion, down 8 percent from $22.2 billion a year ago.

— a gross profit of $35.3 billion, up from $34.8 billion a year ago.

By segment
Microsoft’s Productivity and Business Processes revenue was $17 billion in the second quarter, up 7 percent from $15.9 billion a year ago and above analysts’ general expectations of $16.79 billion. Of this total.

— Office Commercial Products and Cloud Services revenue grew 7 percent year-over-year and drove Office 365 Commercial Products revenue growth of 11 percent

–Office consumer products and cloud services revenue declined 2 percent year-over-year, and Microsoft 365 consumer subscribers grew to 63.2 million

–LinkedIn revenue is up 10 percent

— Dynamics products and cloud services revenue up 13 percent, Dynamics 365 revenue up 21 percent

Microsoft’s Intelligent Cloud revenue was $21.5 billion in the second quarter, up 18 percent from $18.3 billion in the same quarter last year and slightly above analysts’ average forecast of $21.44 billion. Among them:

— Server products and cloud services revenue grew 20 percent

— Azure and other cloud services revenue grew 31 percent

Microsoft’s Other Personal Computing revenue was $14.2 billion in the second quarter, down 19 percent from $17.5 billion in the same quarter last year. Among them:

–Windows OEM revenue declined 39 percent

–Windows Commercial Products and Cloud Services revenue declined 3 percent

–Xbox content and services revenue declined 12 percent

— Search and news advertising revenue, excluding traffic acquisition costs, increased 10 percent

— Device revenue down 39%

Cash Flow
As of December 31, 2022, Microsoft held cash, cash equivalents and short-term investments totaling $99.5 billion. This compares to cash, cash equivalents and short-term investments of $104.8 billion as of June 30, 2022.

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

Executive Commentary
The next major wave of computing is being born as Microsoft Cloud transforms the world’s most advanced artificial intelligence models into a new computing platform,” said Satya Nadella, Microsoft chairman and CEO. We are committed to helping our customers use our platform and tools to do more with less and innovate for the future in the new era of artificial intelligence.”

We are focused on operational excellence as we continue to invest to drive growth,” said Amy Hood, Microsoft executive vice president and chief financial officer. Microsoft cloud revenue reached $27.1 billion, up 22 percent year-over-year, as our commercial offerings continue to create value for our customers.”

Earnings Interpretation
In its latest earnings report, Microsoft reported that its fiscal second-quarter revenue grew 2 percent year-over-year, the lowest quarterly revenue growth rate since 2016. Net income fell to $16.4 billion from $18.8 billion a year ago. Microsoft booked an additional charge of $1.2 billion in its second fiscal year due to the company’s decision to lay off 10,000 employees, improve its hardware lineup and consolidate leased facilities. The charge included $800 million in employee severance costs.

In a conference call with analysts, Microsoft Chief Financial Officer David Hood said business was weak in December, including slower growth in consumption of Azure cloud services. New business growth in Microsoft 365 productivity software subscriptions, Windows business products and enterprise mobility and security products also fell short of management expectations for the month.

Microsoft’s Intelligent Cloud business revenue was $21.5 billion, up 18 percent year-over-year and slightly above the $21.44 billion widely forecast by analysts. The segment includes Azure Public Cloud, Windows Server, SQL Server, Nuance and Enterprise Services. Revenue from Azure and other cloud services grew 31 percent, slightly above analysts’ forecasts of 31 percent.

Azure also steadily took more market share from leader Amazon’s AWS. Azure’s share of the cloud market is 30 percent at the end of 2022, up from 20 percent in 2018, according to Bank of America Global Research estimates, while AWS’s market share fell to 55 percent from 71 percent in the same period.

Azure could get a boost from the growth of artificial intelligence. “There are many ways we can bring AI technology to specific products or improve existing ones,” said Brett Iversen, Microsoft’s director of investor relations. He was referring to the company’s ongoing investment in OpenAI, whose chatbot ChatGPT can generate works in the style of Shakespeare or others through text input.

In the Productivity and Business Processes segment, which includes Microsoft 365 (formerly Office 365), LinkedIn and Dynamic, brought in $17 billion in revenue, up 7 percent year-over-year and beating analysts’ general expectations of $16.79 billion. Teams, a team collaboration app, now has more than 280 million active users per month, Nadella said on the conference call.

More Personal Computing, a division focused on Windows, Xbox, Surface and search advertising, contributed $14.24 billion, down 19 percent year-over-year. Windows licenses sold to device makers fell about 39 percent year-over-year, compared with a 15 percent decline in the fiscal first quarter. Technology industry research firm Gartner estimates that in the fourth quarter of 2022, Microsoft’s personal computer business saw its slowest growth since the mid-1990s.

Nadella revealed that Microsoft achieved more than $20 billion in security revenue in 2022, an increase of about 33 percent over 2021 and a growth rate of about 45 percent for the year.

Microsoft’s earnings kicked off the tech giant’s earnings season as the Nasdaq plunged into its worst-performing year since 2008 and its first four-quarter plunge since the dot-com bubble burst. The job cuts at Microsoft come as Amazon, Google parent Alphabet and Facebook parent Meta all recently announced massive layoffs after they increased hiring during the epidemic and extended the tech industry’s bull market.

In a research note to clients, analysts at Raymond James wrote that Microsoft’s decision to cut jobs shows that “the company is committed to maintaining margins despite revenue instability. They recommended a “buy” on Microsoft stock.

In the second quarter, the Federal Trade Commission (FTC) also sued Microsoft to block its $69 billion acquisition of game publisher Activision Blizzard.

Stock price movement
On Tuesday, Microsoft shares closed at $241.97 per share, down 0.25 percent locally. As of this writing, the stock is trading at $239.30 per share, down more than 1 percent in after-hours trading following the release of the results. As of Monday’s close, Microsoft shares had fallen 29 percent over the past 12 months.

Over the past 52 weeks, Microsoft shares have traded as low as $213.43 and as high as $315.95. Based on Tuesday’s closing price, Microsoft has a market capitalization of about $1.804 trillion.

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