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Earnings Release FY23 Q2

Microsoft Cloud Strength Drives Second Quarter Results

REDMOND, Wash. — January 24, 2023 — Microsoft Corp. today announced the following results for the quarter ended December 31, 2022, as compared to the corresponding period of last fiscal year:

·        Revenue was $52.7 billion and increased 2%  

·        Operating income was $20.4 billion GAAP and $21.6 billion non-GAAP, and decreased 8% and 3%, respectively

·        Net income was $16.4 billion GAAP and $17.4 billion non-GAAP, and decreased 12% and 7%, respectively

·        Diluted earnings per share was $2.20 GAAP and $2.32 non-GAAP, and decreased 11% and 6%, respectively

“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform,” said Satya Nadella, chairman and chief executive officer of Microsoft. “We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

 

“We are focused on operational excellence as we continue to invest to drive growth. Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year-over-year as our commercial offerings continue to drive value for our customers,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.

 

Three Months Ended December 31,

 

 ($ in millions, except per share amounts)

Revenue

Operating Income

Net Income

Diluted Earnings per Share

2021 As Reported (GAAP)

$51,728

$22,247

$18,765

$2.48

2022 As Reported (GAAP)

$52,747

$20,399

$16,425

$2.20

Severance, hardware-related impairment, and lease consolidation costs

-

1,171

946

0.12

2022 As Adjusted

$52,747

$21,570

$17,371

$2.32

Percentage Change Y/Y (GAAP)

2%

(8)%

(12)%

(11)%

Percentage Change Y/Y Constant Currency

7%

0%

(4)%

(3)%

Percentage Change Y/Y (As Adjusted)

2%

(3)%

(7)%

(6)%

Percentage Change Y/Y (As Adjusted) Constant Currency

7%

6%

1%

2%

 

Business Highlights

Revenue in Productivity and Business Processes was $17.0 billion and increased 7% (up 13% in constant currency), with the following business highlights:

·        Office Commercial products and cloud services revenue increased 7% (up 14% in constant currency) driven by Office 365 Commercial revenue growth of 11% (up 18% in constant currency)

·        Office Consumer products and cloud services revenue decreased 2% (up 3% in constant currency) and Microsoft 365 Consumer subscribers grew to 63.2 million

·        LinkedIn revenue increased 10% (up 14% in constant currency)

·        Dynamics products and cloud services revenue increased 13% (up 20% in constant currency) driven by Dynamics 365 revenue growth of 21% (up 29% in constant currency)

Revenue in Intelligent Cloud was $21.5 billion and increased 18% (up 24% in constant currency), with the following business highlights:

·        Server products and cloud services revenue increased 20% (up 26% in constant currency) driven by Azure and other cloud services revenue growth of 31% (up 38% in constant currency)

Revenue in More Personal Computing was $14.2 billion and decreased 19% (down 16% in constant currency), with the following business highlights:

·        Windows OEM revenue decreased 39%

·        Windows Commercial products and cloud services revenue decreased 3% (up 3% in constant currency)

·        Xbox content and services revenue decreased 12% (down 8% in constant currency)

·        Search and news advertising revenue excluding traffic acquisition costs increased 10% (up 15% in constant currency)

·        Devices revenue decreased 39% (down 34% in constant currency)

Microsoft returned $9.7 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2023, a decrease of 11% compared to the second quarter of fiscal year 2022.

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.

Quarterly Highlights, Product Releases, and Enhancements 

Every quarter Microsoft delivers hundreds of products, either as new releases, services, or enhancements to current products and services. These releases are a result of significant research and development investments, made over multiple years, designed to help customers be more productive and secure and to deliver differentiated value across the cloud and the edge.

Here are the major product releases and other highlights for the quarter, organized by product categories, to help illustrate how we are accelerating innovation across our businesses while expanding our market opportunities.

Environmental, Social, and Governance (ESG)

To better execute on Microsoft’s mission, we focus our Environmental, Social, and Governance (ESG) efforts where we can have the most positive impact. To learn more about our latest initiatives and priorities, please visit our investor relations ESG website. 

Webcast Details

Satya Nadella, chairman and chief executive officer, Amy Hood, executive vice president and chief financial officer, Alice Jolla, chief accounting officer, Keith Dolliver, deputy general counsel, and Brett Iversen, vice president of investor relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on January 24, 2024.

Non-GAAP Definition

Q2 charge. In the second quarter of fiscal year 2023, Microsoft recorded costs related to decisions announced on January 18th, including employee severance expenses of $800 million, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities.

Microsoft has provided non-GAAP financial measures related to the impact of these strategic reprioritization actions to aid investors in better understanding our performance. Microsoft believes these non-GAAP measures assist investors by providing additional insight into its operational performance and help clarify trends affecting its business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Constant Currency

Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-GAAP financial information to aid investors in better understanding our performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Financial Performance Constant Currency Reconciliation

 

Three Months Ended December 31,

 ($ in millions, except per share amounts)

Revenue

Operating Income

Net Income

Diluted Earnings per Share

2021 As Reported (GAAP)

$51,728

$22,247

$18,765

$2.48

2022 As Reported (GAAP)

$52,747

$20,399

$16,425

$2.20

2022 As Adjusted

$52,747

$21,570

$17,371

$2.32

Percentage Change Y/Y (GAAP)

2%

(8)%

(12)%

(11)%

Percentage Change Y/Y (As Adjusted)

2%

(3)%

(7)%

(6)%

Constant Currency Impact

$(2,645)

$(1,931)

$(1,563)

$(0.21)

Percentage Change Y/Y Constant Currency

7%

0%

(4)%

(3)%

Percentage Change Y/Y (As Adjusted) Constant Currency

7%

6%

1%

2%

Segment Revenue Constant Currency Reconciliation

 

Three Months Ended December 31,

 ($ in millions)

Productivity and Business Processes

Intelligent Cloud

More Personal Computing

2021 As Reported (GAAP)

$15,936

$18,262

$17,530

2022 As Reported (GAAP)

$17,002

$21,508

$14,237

Percentage Change Y/Y (GAAP)

7%

18%

(19)%

Constant Currency Impact

$(1,002)

$(1,078)

$(565)

Percentage Change Y/Y Constant Currency

13%

24%

(16)%

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

 

Selected Product and Service Revenue Constant Currency Reconciliation        

 

Three Months Ended December 31, 2022

Percentage Change Y/Y (GAAP)

Constant Currency Impact

Percentage Change Y/Y Constant Currency

Microsoft Cloud revenue

22%

7%

29%

Office Commercial products and cloud services

7%

7%

14%

Office 365 Commercial

11%

7%

18%

Office Consumer products and cloud services

(2)%

5%

3%

LinkedIn

10%

4%

14%

Dynamics products and cloud services

13%

7%

20%

Dynamics 365

21%

8%

29%

Server products and cloud services

20%

6%

26%

Azure and other cloud services

31%

7%

38%

Windows OEM

(39)%

0%

(39)%

Windows Commercial products and cloud services

(3)%

6%

3%

Xbox content and services

(12)%

4%

(8)%

Search and news advertising excluding traffic acquisition costs

10%

5%

15%

Devices

(39)%

5%

(34)%

About Microsoft

Microsoft (Nasdaq “MSFT” @microsoft) enables digital transformation for the era of an intelligent cloud and an intelligent edge. Its mission is to empower every person and every organization on the planet to achieve more.

Forward-Looking Statements

Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as:

·        intense competition in all of our markets that may lead to lower revenue or operating margins;

·        increasing focus on cloud-based services presenting execution and competitive risks;

·        significant investments in products and services that may not achieve expected returns;

·        acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business;

·        impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;

·        cyberattacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;

·        disclosure and misuse of personal data that could cause liability and harm to our reputation;

·        the possibility that we may not be able to protect information stored in our products and services from use by others;

·        abuse of our advertising, professional, marketplace, or gaming platforms that may harm our reputation or user engagement;

·        the development of the internet of things presenting security, privacy, and execution risks;

·        issues about the use of artificial intelligence in our offerings that may result in competitive harm, legal liability, or reputational harm;

·        excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;

·        quality or supply problems;

·        government litigation and regulatory activity relating to competition rules that may limit how we design and market our products;

·        potential consequences under trade, anti-corruption, and other laws resulting from our global operations;

·        laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, fines, or reputational damage;

·        claims against us that may result in adverse outcomes in legal disputes;

·        uncertainties relating to our business with government customers;

·        additional tax liabilities;

·        the possibility that we may fail to protect our source code;

·        legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property;

·        claims that Microsoft has infringed the intellectual property rights of others;

·        damage to our reputation or our brands that may harm our business and operating results;

·        adverse economic or market conditions that may harm our business;

·        catastrophic events or geo-political conditions, such as the COVID-19 pandemic, that may disrupt our business;

·        exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange and

·        the dependence of our business on our ability to attract and retain talented employees.

For more information about risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft’s Investor Relations department at (800) 285-7772 or at Microsoft’s Investor Relations website at http://www.microsoft.com/en-us/investor.

All information in this release is as of December 31, 2022. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.

 

For more information, press only:

Microsoft Media Relations, WE Communications for Microsoft, (425) 638-7777, rrt@we-worldwide.com

For more information, financial analysts and investors only:

Brett Iversen, Vice President, Investor Relations, (425) 706-4400

Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news. Web links, telephone numbers, and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today’s 2:30 p.m. Pacific time conference call with investors and analysts, is available at http://www.microsoft.com/en-us/investor.


 

MICROSOFT CORPORATION


INCOME STATEMENTS

(In millions, except per share amounts) (Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

 

2022

 

2021

 

2022

 

2021

Revenue:

   Product

 $16,517

 $20,779

 $32,258

 $37,410

   Service and other

36,230

 

30,949

 

70,611

 

59,635

      Total revenue

52,747

 

51,728

 

102,869

 

97,045

Cost of revenue:

   Product

5,690

6,331

9,992

10,123

   Service and other

11,798

 

10,629

 

22,948

 

20,483

      Total cost of revenue

17,488

 

16,960

 

32,940

 

30,606

      Gross margin

35,259

34,768

69,929

66,439

Research and development

6,844

5,758

13,472

11,357

Sales and marketing

5,679

5,379

10,805

9,926

General and administrative

2,337

1,384

3,735

2,671

Operating income

20,399

 

22,247

 

41,917

 

42,485

Other income (expense), net

(60)

 

268

 

(6)

 

554

Income before income taxes

20,339

22,515

41,911

43,039

Provision for income taxes

3,914

 

3,750

 

7,930

 

3,769

Net income

 $16,425

 

 $18,765

 

 $33,981

 

 $39,270

Earnings per share:

   Basic

 $2.20

 $2.50

 $4.56

 $5.23

   Diluted

 $2.20

 $2.48

 $4.54

 $5.19

Weighted average shares outstanding:

   Basic

7,451

7,505

7,454

7,509

   Diluted

7,473

 

7,555

 

7,479

 

7,561

 


 

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

 

2022

 

2021

 

2022

 

2021

Net income

 $16,425

 

 $18,765

 

 $33,981

 

 $39,270

Other comprehensive income (loss), net of tax:

  Net change related to derivatives

(32)

0

(25)

2

  Net change related to investments

348

(743)

(1,549)

(1,165)

  Translation adjustments and other

570

 

(103)

 

(205)

 

(222)

   Other comprehensive income (loss)

886

 

(846)

 

(1,779)

 

(1,385)

Comprehensive income

 $17,311

 

 $17,919

 

 $32,202

 

 $37,885

 


 

BALANCE SHEETS

(In millions) (Unaudited)


 

December 31,

2022

 

June 30,

2022

Assets

Current assets:

   Cash and cash equivalents

 $15,646

 $13,931

   Short-term investments

83,862

 

90,826

      Total cash, cash equivalents, and short-term investments

99,508

104,757

   Accounts receivable, net of allowance for doubtful
      accounts of $485 and $633

35,833

44,261

   Inventories

2,980

3,742

   Other current assets

19,502

 

16,924

      Total current assets

157,823

169,684

Property and equipment, net of accumulated
   depreciation of $63,459 and $59,660

82,755

74,398

Operating lease right-of-use assets

13,624

13,148

Equity investments

7,097

6,891

Goodwill

67,905

67,524

Intangible assets, net

10,354

11,298

Other long-term assets

24,994

 

21,897

            Total assets

 $364,552

 

 $364,840

Liabilities and stockholders' equity

Current liabilities:

   Accounts payable

 $15,354

 $19,000

   Current portion of long-term debt

3,997

2,749

   Accrued compensation

9,030

10,661

   Short-term income taxes

3,553

4,067

   Short-term unearned revenue

36,982

45,538

   Other current liabilities

12,802

 

13,067

      Total current liabilities

81,718

95,082

Long-term debt

44,119

47,032

Long-term income taxes

24,169

26,069

Long-term unearned revenue

2,644

2,870

Deferred income taxes

289

230

Operating lease liabilities

11,998

11,489

Other long-term liabilities

16,479

 

15,526

         Total liabilities

181,416

 

198,298

Commitments and contingencies

Stockholders' equity:

   Common stock and paid-in capital - shares authorized
      24,000; outstanding 7,447 and 7,464

90,225

86,939

   Retained earnings

99,368

84,281

   Accumulated other comprehensive loss

(6,457)

(4,678)

         Total stockholders' equity

183,136

 

166,542

            Total liabilities and stockholders' equity

 $364,552

 

 $364,840

 


CASH FLOWS STATEMENTS

(In millions) (Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

 

2022

 

2021

 

2022

 

2021

Operations

Net income

 $16,425

 $18,765

 $33,981

 $39,270

Adjustments to reconcile net income to
   net cash from operations:

   Depreciation, amortization, and other

3,648

3,496

6,438

6,708

   Stock-based compensation expense

2,538

1,897

4,730

3,599

   Net recognized losses (gains) on investments and derivatives

214

(307)

192

(671)

   Deferred income taxes

(1,305)

183

(2,496)

(5,787)

   Changes in operating assets and liabilities:

      Accounts receivable

(3,164)

(5,543)

8,565

4,943

      Inventories

1,305

394

762

(383)

      Other current assets

(392)

830

(724)

1,770

      Other long-term assets

(65)

(908)

(731)

(1,506)

      Accounts payable

(2,058)

235

(3,625)

(236)

      Unearned revenue

(5,186)

(4,343)

(8,508)

(7,228)

      Income taxes

(2,863)

(2,057)

(2,453)

596

      Other current liabilities

1,819

1,745

(2,205)

(2,398)

      Other long-term liabilities

257

 

93

 

445

 

343

         Net cash from operations

11,173

 

14,480

 

34,371

 

39,020

Financing

Repayments of debt

(750)

0

(1,750)

(4,826)

Common stock issued

243

291

818

903

Common stock repurchased

(5,459)

(7,433)

(11,032)

(15,117)

Common stock cash dividends paid

(5,066)

(4,652)

(9,687)

(8,858)

Other, net

(317)

 

(192)

 

(581)

 

(364)

         Net cash used in financing

(11,349)

 

(11,986)

 

(22,232)

 

(28,262)

Investing

Additions to property and equipment

(6,274)

(5,865)

(12,557)

(11,675)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

(679)

(850)

(1,028)

(2,056)

Purchases of investments

(11,599)

(2,505)

(16,612)

(12,814)

Maturities of investments

6,928

5,253

13,590

14,115

Sales of investments

4,775

2,895

7,486

8,525

Other, net

(301)

(89)

(1,161)

(506)

         Net cash used in investing

(7,150)

 

(1,161)

 

(10,282)

 

(4,411)

Effect of foreign exchange rates on cash and cash equivalents

88

 

106

 

(142)

 

33

Net change in cash and cash equivalents

(7,238)

1,439

1,715

6,380

Cash and cash equivalents, beginning of period

22,884

 

19,165

 

13,931

 

14,224

Cash and cash equivalents, end of period

 $15,646

 

 $20,604

 

 $15,646

 

 $20,604

 


SEGMENT REVENUE AND OPERATING INCOME

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

Six Months Ended

December 31,

 

 

 

2022

 

2021

 

2022

 

2021

Revenue

 

 

 

 

 

 

 

Productivity and Business Processes

 $17,002

 

 $15,936

 

 $33,467

 

 $30,975

Intelligent Cloud

21,508

 

18,262

 

41,833

 

35,174

More Personal Computing

14,237

 

17,530

 

27,569

 

30,896

  Total

 $52,747

 

 $51,728

 

 $102,869

 

 $97,045

Operating Income

 

 

 

 

 

 

 

Productivity and Business Processes

 $8,175

 

 $7,688

 

 $16,498

 

 $15,269

Intelligent Cloud

8,904

 

8,323

 

17,882

 

16,004

More Personal Computing

3,320

 

6,236

 

7,537

 

11,212

  Total

 $20,399

 

 $22,247

 

 $41,917

 

 $42,485

 

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

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.

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Information contained in these documents is current as of the earnings date, and not restated for new accounting standards