Summary
Microsoft (MSFT) reported its earnings for the period ending December 31, 2022, during which the company saw strong growth in its cloud business, led by Azure and Dynamics 365, as well as continued growth in its Office 365 and LinkedIn businesses. The company also saw strong engagement on its Teams platform and solid growth in its gaming segment.
One of the highlights of the earnings call was the strong performance of the company’s cloud business, which saw revenue of $27.1 billion, a growth of 22% in constant currency. Azure, the company’s cloud computing platform, saw revenue growth of 50%, driven by strong demand for its infrastructure and platform services. Additionally, Dynamics 365, the company’s business applications platform, saw revenue growth of 21% in constant currency, driven by strong demand for its finance and supply chain offerings.
The company’s Office 365 business also performed well, with revenue growth of 11% and 18% in constant currency. The business saw healthy renewal execution and ARPU growth, driven by the continued adoption of the company’s E5 offering. Additionally, LinkedIn saw revenue growth of 10% and 14% in constant currency, driven by growth in its Talent Solutions business.
The company’s Teams platform also saw strong engagement, with monthly active users surpassing 280 million. The platform continues to see strong adoption across various categories, such as collaboration, chat, meetings, and calling. Additionally, Teams Phone, the company’s cloud calling service, saw strong growth and is now the market leader in cloud calling.
The company’s gaming segment also performed well, with new highs for Game Pass subscriptions, game streaming hours, and monthly active devices. Additionally, the company saw strong engagement on its Xbox platform, with monthly active users surpassing 120 million. The company is investing in the platform to add value to Game Pass and has partnered with Riot Games to make their games and premium content available to subscribers.
The company also saw growth in its security business, which surpassed $20 billion in revenue, driven by strong demand for its integrated end-to-end tools that span identity, security, compliance, device management, and privacy. Additionally, the company saw strong demand for its Microsoft Cloud and LinkedIn businesses, which saw revenue growth of 22% and 10%, respectively.
In terms of guidance, the company expects FX to decrease total revenue growth by approximately three points, COGS growth by one point, and operating expense growth by two points. Within the segments, it anticipates roughly four points of negative impact on revenue growth in Productivity and Business Processes, three points in Intelligent Cloud, and two points in More Personal Computing.
Overall, the company reported solid financial results and strong growth across its key businesses. The company is well-positioned in the growing cloud computing and business applications market, and its Teams platform is becoming an essential tool for organizations as they adapt to the new world of work. Additionally, the company’s gaming segment is seeing strong engagement and growth, and its security business is becoming a key driver of revenue growth.
Highlights
- Microsoft Cloud revenue was $27.1 billion and grew 22% and 29% in constant currency, ahead of expectations.
- Microsoft Cloud gross margin percentage increased roughly two points year over year to 72%, driven by lower energy costs
- Dynamics 365, which grew 21% and 29% in constant currency
- Office 365 Commercial revenue increased 11% and 18% in constant currency.
- LinkedIn revenue increased 10% and 14% in constant currency.
- Intelligent Cloud segment revenue was $21.5 billion, increasing 18% and 24% in constant currency
- Xbox content and services revenue declined 12% and 8% in constant currency.
- Capital expenditures were $6.8 billion to support cloud demand.
- Free cash flow was $4.9 billion, down 43% year over year.
- Returned $9.7 billion to shareholders through share repurchases and dividends.
- For the next quarter, FX is expected to decrease total revenue growth by approximately three points, COGS growth by one point, and operating expense growth by two points
- Microsoft Cloud gross margin percentage should be up roughly one point year over year
- In Productivity and Business Processes, we expect revenue to grow between 11% and 13% in constant currency
- Office 365 revenue is expected to be driven by seat growth across customer segments and ARPU growth through E5.
- LinkedIn revenue is expected to be impacted by ad market spending remaining cautious.
- In commercial bookings, we expect growth to be relatively flat over year due to declining expiry base and slowdown of new business.
Challenges
- Slowdown in growth of new business
- Impact from the slowdown of new business noted earlier
- Impact from FX
- Decline in Windows OEM and devices as the PC market returns to pre-pandemic levels
- Impact on LinkedIn and search from ad market spending remaining cautious
- Consistency in execution across sales motions and core commitments to platform will be offset by impact from slowdown of new business and inclusion of Nuance in prior year.
Outlook
- Expecting FX to decrease total revenue growth by approximately three points, COGS growth by one point, and operating expense growth by two points.
- Expecting consistent execution across core and sales motions in the commercial bookings, but growth is expected to be relatively flat over year due to a declining expiry base and strong prior-year comparable in terms of large Azure contracts.
- Anticipating impact from slowdown of new business and three points of unfavorable impact from the inclusion of Nuance in the prior year.
- Expecting Microsoft Cloud gross margin percentage to be up roughly one point year over year, driven by a change in accounting estimate.
- Expecting a sequential increase in capital expenditures on a dollar basis with normal quarterly spend variability in the timing of cloud infrastructure build-out.
- In the Productivity and Business Processes segment, expecting revenue to grow between 11% and 13% in constant currency, driven by Office 365 Commercial revenue growth.
- In Intelligent Cloud, expecting revenue to grow between 17% and 19% in constant currency, driven by Azure revenue growth.
- In More Personal Computing, expecting revenue to decline between 4% and 1% in constant currency, due to the decline in Windows OEM and devices as the PC market returns to pre-pandemic levels.
