Microsoft income progress slows as cloud enterprise helps offset Home windows decline

A declining PC market, macroeconomic headwinds, and a strong U.S. dollar are slowing Microsoft’s revenue growth numbers, but the Redmond tech giant still beat expectations for its first fiscal quarter earnings report.

The company’s cloud computing arm continued to boost overall business. Microsoft Cloud revenue reached $25.7 billion in the quarter, up 24% year-over-year and representing more than half of total revenue, but down from 36% growth in the year-ago quarter.

But total revenue growth slowed to a five-year low. Revenue from the Windows OEM sector, which comes from equipment manufacturers that install Windows on their machines, was down 15%. The company cited “continued deterioration in the PC market.”

“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” Microsoft CEO Satya Nadella said in a statement. “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.”

Looking ahead, Microsoft CFO Amy Hood said “our outlook has many of the trends we saw at the end of Q1 continue into Q2.” Those trends include weaker PC demand, which impacts Windows OEM; lower advertising spend, which affects LinkedIn revenue; and high energy costs abroad, which cut into Microsoft’s cloud business margins. Hood forecasted lower Azure margins, in part due to higher energy costs, which are causing about $250 million in extra expense each quarter this fiscal year.

Hood also said headcount growth in the current quarter will be “minimal.” Microsoft reported layoffs earlier this month.

Shares of Microsoft were down slightly in after-hours trading, and continued falling following guidance provided by the company. The stock is down more than 25% this calendar year.

Here’s a quick rundown of the Q1 2023 numbers:

• Revenue: $50.1 billion, up 11% from the year-ago period, vs. $49.7 billion expectation and vs. 22% growth a year ago.
• Profits: $17.6 billion, down 14% from a year ago. (Profits in the year-ago quarter included an unusual $3.3 billion tax benefit)
• Earnings per share: $2.35/share, down 13%, vs. $2.31/share expectation.
• Azure revenue up 35%, vs. 50% growth a year ago
• Linkedin revenue: $3.67 billion, up 17%, vs. 42% growth a year ago

Divisional results:

• Productivity and Business Processes (including Office): Revenue of $16.5 billion, up 9% (15% in constant currency) vs. 22% growth a year ago.
• More Personal Computing (including Windows and Xbox): Revenue of $13.3 billion, down slightly (up 3% in constant currency), vs. 12% growth a year ago.
• Intelligent Cloud (including Azure and server products): Revenue of $20.3 billion, up 20% (26% in constant currency), vs. 31% growth a year ago.

Guidance for FY23 Q2:

• Productivity and Business Processes: Revenue of $16.6 billion to $16.9 billion, compared to $15.9 billion in the year-ago period.
• More Personal Computing: Revenue of $14.5 billion to $14.9 billion, compared to $17.5 billion in the year-ago period.
• Intelligent Cloud: Revenue of $21.25 billion to $21.55 billion, compared to $18.3 billion in the year-ago period.

Notes from the earnings call:

• Nadella said GitHub is now a $1 billion business (based on annual recurring revenue) with 90 million active users. That’s a substantial jump from 2017 when Microsoft acquired the developer service.
• More than 20 million people have used Xbox Cloud Gaming, the company’s cloud-based gaming service. That’s up from 10 million earlier this year.
• More than 860,000 organizations use Microsoft’s security products, up 33% year-over-year. It’s one of Microsoft’s key growth areas.