First Look at MSFT Q4 2022 Earnings – Microsoft Financial Results

Microsoft, good at Diversification strategy operations, reported an annual increase of 12% in Q2 revenue to 51.9 billion.
Xbox hardware sales -11%, game content -7% and PC sales worsened the most. The main source of Microsoft’s growth and profit is Intelligence Cloud. (including Azure public cloud, SQL Server, Windows Server, etc.) Its revenue increased by 20% to 20.9 billion.

Highlights of 2022 Q4’s Microsoft earnings report

Revenue & Profitability

Overall, although Microsoft’s revenue this quarter still maintained growth and set a record high, it has dropped significantly compared to last year’s growth rate. And Microsoft’s profitability has also declined because the rate of increase in operating costs and expenses is higher than the revenue growth rate.

Revenue

Microsoft (MSFT) Q4 2022’s overall revenue reached $51.9 billion, setting a record high again, with an annual growth rate of 12%. Compared with the 18% growth rate in the previous quarter, there was an apparent recession.

Gross margin

Microsoft’s gross margin for the quarter was 68%, down from 70% in the same period last year.

Operating Income

Microsoft (MSFT) Q4 2022’s operating income reached US$20.5 billion, an increase of 8% compared to the same period last year. The operating income percentage reached 40%, a record low after the epidemic, obviously affected by the surge in operating expenses.

Net income

Microsoft (MSFT) Q4 2022’s net income reached $16.7 billion, and YoY grew 2%. Diluted EPS reached $2.23.

Operational Summary

Let’s look into the Microsoft Segment information.

Productivity and Business Processes

Productivity and Business Processes’ revenue this quarter reached $16.6 billion, with an annual growth rate of 13%. It is a significant decline compared to YoY’s 25% or the previous quarter’s 17%.

Office products

Revenues from Office Commercial products rose 9 percent, with Office 365 Commercial growing 15 percent, the fourth consecutive quarter of declines. Revenue from Office Consumer products also rose 9 percent, while subscribers grew 15 percent to 59.7 million.

LinkedIn and Dynamics products

LinkedIn’s performance continues to be strong.LinkedIn revenue increased 26% (up 29% in constant currency), continuing to hit new all-time highs. Dynamic revenue was up 19%, with Dynamic 365 revenue up 31%.

Intelligent Cloud

The Intelligent Cloud segment. Revenue was $20.9 billion, increasing 20% and 25% in constant currency.

Server products and cloud services

Revenue decreased 2% and increased 1% in constant currency.

Server products revenue decreased 2% due to a strong prior year comparable that included benefit from an increase in multi-year agreements that carry higher in-quarter revenue recognition, offset in part by demand for our hybrid solutions and Nuance.

Azure and other cloud services

Azure and other cloud services revenue grew 40%, driven by growth in our consumption-based services. Although it is lower than the last quarter, it is the same as last year’s level.

More Personal Computing

Revenue in More Personal Computing was $14.4 billion and increased 2% (up 5% in constant currency). Considering that the overall PC market is in recession, this performance is not bad.

Windows

Windows OEM revenue decreased 2%.

Windows Commercial products and cloud services revenue increased 6% (up 12% in constant currency).

Surface

Surface revenue grew 10% and 15% in constant currency driven by commercial sales.

Gaming(Xbox content and services)

In Gaming, revenue declined 7% and 5% in constant currency, in line with expectations. Whether it is software content revenue or hardware sales, there is a decline. Xbox hardware revenue declined 11% and 8% in constant currency. Xbox content and services revenue declined 6% and 4% in constant currency, driven by lower engagement hours and monetization in third-party and first-party content, partially offset by growth in Xbox Game Pass subscriptions.

Search and news advertising

Search and news advertising revenue increased 18% and 21% in constant currency, lower than expected driven by the slowdown in advertising spend noted earlier, partially offset by the inclusion of three weeks of results from Xandr. Since advertisers have begun to decrease in the 2nd quarter of this year, this performance is quite impressive, especially Google’s search advertising growth rate of only 13.5%.

Business Outlook

Microsoft (MSFT) believes that in the upcoming fiscal year 2023 (2022 Q3 – 2023 Q4), they can achieve double-digit growth in both revenue and Operating Income. Operating expenses will grow significantly (YoY) in the first half of the upcoming fiscal year 2023 but slow down in the second half. In terms of operating profit margin, it is expected to remain at the same level as the previous year.
For FY23 Q1, Microsoft (MSFT) expects revenue from the Productivity and Commerce business group to reach $15.95-$16.25 billion. Revenue from the Intelligent Cloud segment is estimated to be in the range of $20.3-$20.6 billion. In the PC business, revenue is estimated to be in the range of $13-13.4 billion.

Highlights of Microsoft (MSFT) Q4 2022’s Earnings Call

1. Azure continues to get longer and larger contracts. The new contracts with $100 million and $1 billion-plus this quarter set a high record.
2. Along with NVIDIA, Microsoft also sees a trend in the future where AI models will become a significant platform.
3. Microsoft (MSFT) Power Platform has nearly 25 million monthly active users.
4. Teams Rooms bridges the gap between people working remotely and those in the office, with innovations like AI-powered cameras. More than 60 percent of the Fortune 500 have chosen Teams Rooms to connect employees across the hybrid workplace.
5. Microsoft (MSFT) security revenue increased 40 percent.
6. LinkedIn Talent Solutions surpassed 6 billion in revenue over the past 12 months, up 39 percent year-over-year. And LinkedIn Marketing Solutions surpassed 5 billion dollars in annual revenue for the first time.
7. The extended production shutdowns in China that continued through May and a deteriorating PC market in June contributed to a negative Windows OEM revenue impact of more than $300 million.
8. Microsoft (MSFT) will have 11,000 hires that start in FY23 Q1.
9. Microsoft (MSFT) expects Office 365 revenue growth to be sequentially lower by roughly two points on a constant currency basis with a bit more FX impact on US dollar growth than at the segment level.

Area to Watch

1. Cash cow No. 1 – Is Office 365 growth really slowing down? If we refer to the Constant Currency figures that exclude the impact of the US dollar exchange rate, the growth rates in the past four seasons were 21%, 19%, 20%, and 19%, respectively. However, the current guidance given by Microsoft, growth will indeed be slightly lower.
2. Cash cow No. 2 – Azure, which seems to be growing quite solidly now. Even though Microsoft is seeing waning demand from SMBs, large, long-term contracts appear to be able to make up for that loss. Azure is one of the most competitive options out there. Microsoft’s forecast for the next quarter is that growth will decline to 43%. Of course, the above two Cash cows will still be affected by the exchange rate in the coming quarters, and the figures handed over on the books will be worse than the actual ones.
3. LinkedIn’s 26% revenue growth rate is undoubtedly very good in this quarter when many social networking sites and advertising companies are experiencing growth difficulties, and even 29% if the exchange rate effect is deducted. The main reason is that its usage growth is better than other competitors, which may be because LinkedIn’s market penetration is still far from saturation.