Earnings Release FY23 Q1

Performance

Revenue increased $4.8 billion or 11% driven by growth in Intelligent Cloud and Productivity and Business Processes. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue decreased slightly primarily driven by a decline in Windows, offset in part by growth in Search and news advertising.

Cost of revenue increased $1.8 billion or 13% driven by growth in Microsoft Cloud and Gaming, offset in part by a reduction in depreciation expense due to the change in accounting estimate for the useful lives of our server and network equipment.

Gross margin increased $3.0 billion or 9% driven by growth in Intelligent Cloud and Productivity and Business Processes and the change in accounting estimate, offset in part by a decline in More Personal Computing.

• Gross margin percentage decreased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage decreased 3 points driven by reductions in More Personal Computing and Intelligent Cloud.

• Microsoft Cloud gross margin percentage increased 2 points to 73%. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage decreased 1 point driven by sales mix shift to Azure and other cloud services and lower margins in Azure and other cloud services, primarily due to higher energy costs.

Operating expenses increased $1.7 billion or 15% driven by investments in cloud engineering, LinkedIn, Nuance, and commercial sales.

Key changes in operating expenses were:

• Research and development expenses increased $1.0 billion or 18% driven by investments in cloud engineering and LinkedIn. Research and development included a favorable foreign currency impact of 2%.

• Sales and marketing expenses increased $579 million or 13% driven by investments in commercial sales, Nuance, and LinkedIn. Sales and marketing included a favorable foreign currency impact of 4%.

• General and administrative expenses increased $111 million or 9% driven by investments in corporate functions. General and administrative included a favorable foreign currency impact of 3%.

Operating income increased $1.3 billion or 6% driven by growth in Intelligent Cloud and Productivity and Business Processes and the change in accounting estimate, offset in part by a decline in More Personal Computing.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 5%, 7%, and 9%, respectively. Cost of revenue and operating expenses both included a favorable foreign currency impact of 3%.

Prior year net income and diluted EPS were positively impacted by the net tax benefit related to the transfer of intangible properties, which resulted in an increase to net income and diluted EPS of $3.3 billion and $0.44, respectively.

IMPORTANT NOTICE TO USERS (summary only, click here for full text of notice); All information is unaudited unless otherwise noted or accompanied by an audit opinion and is subject to the more comprehensive information contained in our SEC reports and filings. We do not endorse third-party information. All information speaks as of the last fiscal quarter or year for which we have filed a Form 10-K or 10-Q, or for historical information the date or period expressly indicated in or with such information. We undertake no duty to update the information. Forward-looking statements are subject to risks and uncertainties described in our Forms 10-Q and 10-K.