Microsoft (MSFT) Q2 2023 results

Microsoft hits profit with strong cloud unit growth

Microsoft issued a disappointing sales forecast for the current quarter in its earnings call on Thursday after the company reported December quarter earnings that beat estimates. The stock pared gains, down about 1% in extended trading after an initial rally. The company saw business in its core Windows and Office businesses slump in December, CEO Satya Nadella told analysts on a conference call.

Here’s how the company did it:

  • Merits: $2.32 per share, adjusted, versus $2.29 per share as expected by analysts, according to Refinitiv.
  • Revenue: $52.75 billion versus $52.94 billion expected by analysts, according to Refinitiv.

Microsoft was claiming third-quarter revenue of $50.5 billion to $51.5 billion, up 3% in implied growth, while analysts polled by Refinitiv had expected $52.43 billion.

In the fiscal second quarter, total revenue for the quarter ended December 31 rose 2% year over year, the slowest rate since 2016, according to a expression. Net income fell to $16.43 billion from $18.77 billion in the year-ago quarter. The company took a $1.2 billion charge during the quarter related to its decision to cut 10,000 jobs, revamp its hardware lineup and consolidate leases. The charge includes $800 million in employee severance costs.

Business slowed in December, including a surge in usage of Azure cloud services, Microsoft CFO Amy Hood said on the earnings call. This month, new business growth for Microsoft 365 productivity software subscriptions, Windows commercial products, and enterprise mobility and security offerings was slower than management expected, Hood said.

Revenue in Microsoft’s intelligent cloud segment was $21.51 billion, up 18% and slightly above the consensus of $21.44 billion among analysts polled by StreetAccount. The unit includes the Azure Public Cloud, Windows Server, SQL Server, Nuance and Enterprise Services. Revenue from Azure and other cloud services that Microsoft doesn’t report in dollars grew 31%, slightly above the nearly 31% estimate that analysts polled by CNBC and StreetAccount had expected. In the previous quarter, the category grew 35%.

Hood said she expects Azure cloud growth to slow again in the fiscal third quarter. She said in December that it was in the mid-range of 30% on a currency-neutral basis in December, and she sees it falling 4 to 5 percentage points in the fiscal third quarter. Amazon Shares rose as much as 3% in after-hours trading immediately after Microsoft’s announcement, before turning negative.

The productivity and business processes segment, which includes Microsoft 365 (formerly known as Office 365), LinkedIn and Dynamics, had revenue of $17 billion, up 7% and beating the StreetAccount consensus of $16.79 billion -Dollar. Teams’ communications app now has over 280 million monthly active users, said CEO Satya Nadella.

The More Personal Computing segment, which includes Windows, Xbox, Surface and search advertising, contributed $14.24 billion, down 19% in revenue. Sales of Windows licenses to device makers fell about 39% year over year, slowing from a 15% decline in the fiscal first quarter. Technology industry researcher Gartner estimated PC business posted the slowest growth in the fourth quarter of 2022 since the company began tracking the market in the mid-1990s.

Hood said his Surface group addressed execution challenges in the quarter that the company unveiled the Surface Pro 9.

According to Nadella, Microsoft generated over $20 billion in security revenue in 2022, up about 33% from 2021, when the growth rate was about 45%.

Microsoft’s report kicks off earnings season for the mega-cap technology companies, with the Nasdaq coming off its worst year since 2008 and its first four-quarter drop since the dot-com crash. Along with the layoffs from Microsoft, Amazon, alphabet and Meta All recently announced significant job cuts after halting hiring during the Covid pandemic and the ongoing tech bull market. Meta is scheduled to report results next Wednesday, followed a day later by Alphabet, Amazon and Apple.

The decision to reduce headcount at Microsoft “demonstrates a commitment to margin defense despite revenue volatility,” Raymond James analysts wrote in a note to clients on Monday. They recommend buying Microsoft stock.

During the quarter, the US Federal Trade Commission sued Microsoft to block its pending $69 billion acquisition of a game publisher Activision Blizzard, while the US Department of Defense awarded Microsoft and three other companies a cloud contract totaling up to $9 billion. “We continue to work with regulatory authorities to review the transaction and are working towards closing in fiscal 2023, subject to obtaining necessary regulatory approvals and satisfying other customary closing conditions,” Microsoft said in a submission.

Excluding the after-hours move, Microsoft stock is flat so far this year, while the S&P 500 stock index is up 4%.

This is breaking news. Please check again for updates.

Correction: This news item has been updated to reflect that Microsoft’s conference call with analysts will begin Tuesday at 5:30 p.m. ET. An earlier version gave an incorrect time.

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Over the long term, Microsoft has a massive secular growth history, says Horan von Oppenheimer Microsoft (MSFT) Q2 2023 results


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