Microsoft earnings come up quick, hit by world financial tendencies and cutbacks

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Microsoft CEO Satya Nadella. (GeekWire File Photo / Todd Bishop)

Microsoft just reported its financial results for the three months ended June 30, 2022, the fourth quarter of its 2022 fiscal year. Both revenue and profits came in below Wall Street’s expectations. Microsoft said “evolving macroeconomic conditions and other unforeseen items” impacted its results in several ways.

Some of the highlights:

  • Revenue: $51.9 billion, up 12%, vs. $52.4 billion expectation.
  • Profits: $16.6 billion, up 2% vs. a year ago.
  • EPS: $2.23/share, up 3%, vs. 2.30/share expectation.
  • Azure revenue up 46% (adjusted) vs. 47% guidance.
  • Linkedin revenue: $3.7 billion, up 26%, vs. 46% growth a year ago.

These are the factors Microsoft cited in its earnings release:

  • Unfavorable foreign exchange rate movement within the quarter negatively impacted revenue and diluted earnings per share $(595) million and $(0.04), respectively. …
  • Extended production shutdowns in China that continued through May and a deteriorating PC market in June contributed to a negative impact on Windows OEM revenue of over $(300) million
  • Reductions in advertising spend contributed to a negative impact on LinkedIn as well as Search and news advertising revenue of over $(100) million.
  • With the ongoing war in Ukraine, we made the decision to significantly scale down our operations in Russia. As a result, we recorded operating expenses of $126 million related to bad debt expense, asset impairments, and severance.
  • As part of a strategic realignment of our business groups, we recorded employee severance expenses of $113 million, excluding Russia.

Divisional results: The impact of the slowing economy and negative foreign exchange rates was evident in each of Microsoft’s three divisions.

  • Productivity and Business Processes (including Office): Revenue of $16.6 billion, up 13% (17% in constant currency) vs. 25% growth a year ago.
  • More Personal Computing (including Windows and Xbox): Revenue of $14.4 billion, up 2% (5% in constant currency), vs. 9% growth a year ago.
  • Intelligent Cloud (including Azure and server products): Revenue of $20.9 billion, up 20% (25% in constant currency), vs. 30% growth a year ago.
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Job cuts: Microsoft didn’t disclose the specific number of jobs eliminated earlier this month, other that to say it was less than 1% of its 181,000 employees worldwide. For reference, the company recorded $330 million in severance charges when it eliminated 5,000 positions starting in January 2009 vs. the $113 million this time.

The closely watched revenue growth rate in the company’s Azure cloud business was 40% as reported, or 46% when adjusted for the impact of foreign exchange rates, missing by 1 point the guidance the company provided previously.

Cloud traction: Amy Hood, Microsoft’s chief financial officer, said in a statement that the company saw “strong demand, took share, and increased customer commitment to our cloud platform,” in the quarter, citing commercial bookings growth of 25%, and Microsoft Cloud revenue of $25 billion, up 28% year-over-year.

The company says it boosted market share in areas including data and analytics, security and Teams.

Economy: Microsoft CEO Satya Nadella alluded to the tough economic conditions in his statement in the release, saying that the company is uniquely positioned to help companies seeking to use technology to do more with less.

Guidance: Highlights from Hood’s comments on the call.

  • Microsoft expects double-digit revenue and operating income growth in the upcoming fiscal year, due to continued momentum in its commercial business, and market-share gains.
  • Operating expenses will grow significantly in the early part of the fiscal year, but that will change as Microsoft slows its hiring “to focus on key growth areas and increase the productivity of prior year headcount investments.”
  • In the first quarter, the company expects Azure revenue growth to be about 3 points lower, or about 43%, adjusted for currency fluctuations, which is still above the 40% benchmark that analyst Dan Ives has suggested.
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Microsoft shares rose 4% in extended trading, after initially declining following the earnings report.

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