”We’re focused on helping our customers do more with less” – Microsoft CEO
Microsoft reported results Tuesday for the first quarter of its fiscal year 2023 earnings, the period ending September 30, 2022. For the quarter, Microsoft reported revenue of $50.1 billion, moderately higher than the $49.61 billion some Wall Street analysts expected. Operating income was $21.5 billion, up 6%, while net income was $17.6 billion, down 14%. Earnings per share (EPS) were $2.35, down 13% and about $0.05 off from analyst expectations leading into the earnings call.
Microsoft CEO Satya Nadella said the sobering numbers are making Microsoft focus on fundamentals going forward. “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way,” Nadella said.
Microsoft Cloud revenue clocked in at $25.7 billion, up 24% year over year. Microsoft’s Intelligent Cloud business segment, which includes Azure, Windows Server, Nuance (which Microsoft completed acquiring earlier this year) and Enterprise Services, generated $20.33 billion for the quarter, up 20% but just short of Wall Street expectations. Server products and cloud services revenue increased 22%, buoyed by Azure and other cloud services growth.
Azure revenues grew by 35%, lower than Microsoft’s original guidance for the quarter by 1%. That’s a marked sequential slowdown (40% last quarter) and also a big drop from the same quarter a year ago (50%). Microsoft CFO Amy Hood said that Azure will slow down again this quarter, predicting a 5% decline in growth. Hood also said that higher energy costs would impact Azure gross margins for the current quarter.
Nadella highlighted Microsoft’s success with Azure Arc, the company’s hybrid and multi-cloud management service for Azure. “We now have more than 8,500 Arc customers, more than double the number a year ago,” he said.
Nadella also touted Microsoft’s deepened ties with Oracle to enable Azure users to see and use databases hosted by Oracle Cloud Infrastructure. “We are the only cloud provider with direct and secure access to Oracle databases running an Oracle Cloud infrastructure, making it possible for companies like FedEx, GE, and Marriott to use capabilities from both companies,” said Nadella.
Hood told analysts that Azure performance was “generally in line with where we expected,” admitting that the “macroeconomic environment got more complicated” during the quarter as well. Nadella said on the same call that cyclical trends are affecting Microsoft’s consumer business. That message was repeated by Hood.
“With the high margins in our Windows OEM business and the cyclical nature of the PC market, we take a long-term approach to investing in our core strategic growth areas and maintain these investment levels regardless of PC market conditions. Therefore, with our first quarter results and lower expected OEM revenue for the remainder of the year as well as over $800 million of greater-than-expected energy cost, we now expect operating margins in US dollars to be down roughly a point year over year,” she said.
Revenue from Windows OEM licenses to device makers dropped 15% year over year, the sharpest reduction Microsoft has seen since 2015. Market analysts and other tech firms have been broadcasting the slowdown in PC sales, so the news is no. great surprise, though the percentage numbers are slightly higher than Microsoft offered during its July guidance.
“Despite the drop in PC shipments during the quarter, Windows continues to see usage growth. All up, there are nearly 20% more monthly active Windows devices than pre-pandemic. And on average, Windows 10 and Windows 11 users are spending 8.5% more time on their PCs than they were two and a half years ago. And we are seeing larger commercial deployments of Windows 11,” said Nadella.
