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Microsoft (MSFT) Q2 Earnings Beat, Guidance Lacks Luster
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Microsoft (MSFT - Free Report) reported second-quarter fiscal 2023 earnings of $2.32 per share, which beat the Zacks Consensus Estimate by 2.2% but declined 6.5% on a year-over-year basis.
Revenues of $52.7 billion increased 2% year over year but missed the Zacks Consensus Estimate by 0.34%. On a non-GAAP basis, revenues increased 2% year over year and at constant currency (cc), revenues increased 7% year over year.
Commercial bookings increased 7% and 4% in cc, lower than expected. Consistent execution across renewal sales motions, including strong recapture rates and growth in Azure commitments on a high prior year comparable were partially offset by the slowdown in growth of new standalone business.
Commercial remaining performance obligation increased 29% and 26% in cc to $189 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 24% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 32%.
Microsoft Cloud revenues were $27.1 billion, up 22% (up 29% in cc) year over year, driven by healthy demand across commercial businesses.
Business weakened in December, including in growth of consumption of Azure cloud services. During that month, growth in new business was lower than management had expected for Microsoft 365 productivity software subscriptions, Windows Commercial products and Enterprise Mobility and Security offerings.
Microsoft Corporation Price, Consensus and EPS Surprise
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32.2% to total revenues. Revenues increased 7% (up 13% at cc) on a year-over-year basis to $17 billion.
Office Commercial products and cloud services revenues increased 7% (up 14% in cc), driven by Office 365 Commercial revenue growth of 11% (up 18% in cc). Continued momentum in the small and medium businesses, as well as in frontline worker offerings, drove top-line growth.
Office Consumer products and cloud services revenues decreased 2% (up 3% in cc). Microsoft 365 Consumer subscribers grew to 63.2 million in the reported quarter, up 12% year over year.
Dynamics revenues grew 13% and 20% in cc because of Dynamics 365, which grew 21% and 29% in constant currency.
LinkedIn revenues increased 10% and 14% in cc, driven by growth in Talent Solutions partially offset by weakness in Marketing Solutions from the advertising trends.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 40.8% to total revenues. The segment reported revenues of $21.5 billion, up 17.8% (24% at cc) year over year.
Server product and cloud services revenues rallied 20% year over year (up 26% at cc). Azure and other cloud services revenues grew 31% and 38% in cc. Growth continued to moderate particularly in December. Microsoft exited the quarter with Azure cc growth in the mid-30s.
The enterprise mobility and security installed base grew 16% to over 241 million seats with impact from the slowdown in growth of new business.
Enterprise service revenues increased 2% (up 7% at cc) in the reported quarter owing to growth in Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 27% to total revenues. Revenues decreased 18.8% year over year (down 16% at cc) to $14.2 billion due to a decline in Windows, partially offset by growth in Search and news advertising.
Windows commercial products and cloud services revenues decreased 3% year over year (up 3% at cc), primarily due to the slowdown in growth of new business in standalone offerings.
Windows OEM revenues were down 39% year over year due to a deteriorating PC market. Excluding the impact from the Windows 11 deferral last year, revenues declined 36% on a strong prior year comparable.
Search and news advertising revenues, excluding traffic acquisition costs increased 10% (up 15% at cc), driven by higher search volume and Xandr.
Gaming revenues declined 13% and 9% at cc. Xbox hardware revenues decreased 13% (down 9% at cc). Xbox content and services revenues decreased 12% (down 8% at cc) due to a decline in first-party content.
Operating Results
Gross profit increased 1.4% year over year to $35.2 billion. The gross margin contracted 40 basis points (bps) to 66.8% on a year-over-year basis.
Microsoft cloud gross margin increased roughly 2 points year over year to 72%. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased roughly 1 point due to a sales mix shift to Azure.
Operating expenses increased 18.7% year over year (up 13% at cc) to $14.8 billion. Operating expense growth was driven by investments in cloud engineering, the Nuance acquisition and LinkedIn.
The software maker took $1.2 billion charge in the quarter in connection with its decision to eliminate 10,000 employees. The charge includes $800 million in employee severance costs.
Operating income was $20.4 billion GAAP and $21.6 billion non-GAAP, decreased 8% and 3% on a year-over-year basis, respectively. The GAAP operating margin contracted 430 bps on a year-over-year basis to 38.7%.
Productivity & Business Process operating income rose 6.3% to $8.17 billion. Intelligent Cloud operating income increased 7% to $8.9 billion. More Personal Computing operating income declined 46.8% to $3.3 billion.
Balance Sheet & Cash Flow
As of Dec 31, 2022, Microsoft had total cash, cash equivalents and short-term investments balance of $99.5 billion comparing with $107.2 billion as of Sep 30, 2022.
As of Dec 31, 2022, long-term debt (including the current portion) was $48 billion compared with $48.5 billion as of Sep 30, 2022.
Operating cash flow during the reported quarter was $11.1 billion compared with $23.1 billion in the previous quarter. Free cash flow during the quarter was $4.9 billion compared with $16.9 billion in the prior quarter.
In the reported quarter, the company returned $9.7 billion to shareholders in the form of share repurchases ($5.4 billion) and dividends payouts ($5.06 billion).
Guidance
For the fiscal third quarter, Microsoft expects cost of goods sold to grow between 1% and2% in cc or to be between $15.65 billion and $15.85 billion and operating expenses to grow between 11% and12% in cc or between $14.7 billion and $14.8 billion.
Other income and expense are expected to be roughly $200 million as interest income is likely to more than offset interest expense, per company guidance. The company expects Q3 effective tax rate to be between 19% and 20%.
For the fiscal third quarter, Microsoft expects revenue growth in the productivity and business processes segment between 11% and 13% in cc to a range of $16.9-$17.2 billion. Microsoft expects Office 365 revenue growth to be sequentially lower by roughly one point in cc. In on-premises business, revenues are expected to decline in the mid-20s range.
In Office consumer, Microsoft expects revenue growth in the low-single digits, driven by Microsoft 365 subscriptions.
For LinkedIn, the company expects mid-single digits revenue growth with continued strong engagement on the platform. In Dynamics, Microsoft expects revenue growth in the low to mid-teens driven by continued growth in Dynamics 365 which is now over 80% of total Dynamics revenues.
For Intelligent Cloud, Microsoft anticipates revenues in constant currency to increase between 17% and 19% to a range of $21.7-$22 billion. Microsoft warned that revenue growth from Azure, the cloud computing platform that has become one of the main engines of its business, would slow by 4 or 5 percentage points sequentially in the fiscal third quarter, leaving aside the effect of currency movements.
In on-premises server business, Microsoft expects revenues to decline low-single digits as demand for hybrid solutions is expected to be more than offset by unfavorable FX impact. Enterprise Services revenues are expected to decline low to mid-single digits due to Microsoft Consulting Services.
For more personal computing, the company projects revenues between $11.9 billion and $12.3 billion, pressured by the sharp decline in the personal computer market. The company sees Windows OEM revenues to decline in the mid-to-high 30s in line with the PC market.
Microsoft expects Xbox content and services revenues to decline in the low-single digits as growth in Xbox Game Pass subscriptions will be more than offset by lower monetization per hour in third-party and first-party content.
Post Q2 Developements
Microsoft's announcement follows news that the company is engaging in a multi-year, multi-billion-dollar investment in OpenAI in an attempt to better tackle competitors including Amazon (AMZN - Free Report) owned Amazon Web Services and Alphabet’s (GOOGL - Free Report) Google Cloud.
The investment is expected to help Microsoft further differentiate its cloud offerings from competitors like Amazon and Google. The company is also said to be bringing the technology to its Bing search engine, a move that could threaten Google’s search dominance.
This Zacks Rank #3 (Hold) company is also continuing in its effort to purchase video game giant Activision Blizzard for $69 billion. So far, the Federal Trade Commission, the U.K.’s Competition and Markets Authority and the E.U.’s European Commission have either lodged complaints about ,or are outright working to scuttle the deal. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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Microsoft (MSFT) Q2 Earnings Beat, Guidance Lacks Luster
Microsoft (MSFT - Free Report) reported second-quarter fiscal 2023 earnings of $2.32 per share, which beat the Zacks Consensus Estimate by 2.2% but declined 6.5% on a year-over-year basis.
Revenues of $52.7 billion increased 2% year over year but missed the Zacks Consensus Estimate by 0.34%. On a non-GAAP basis, revenues increased 2% year over year and at constant currency (cc), revenues increased 7% year over year.
Commercial bookings increased 7% and 4% in cc, lower than expected. Consistent execution across renewal sales motions, including strong recapture rates and growth in Azure commitments on a high prior year comparable were partially offset by the slowdown in growth of new standalone business.
Commercial remaining performance obligation increased 29% and 26% in cc to $189 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 24% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 32%.
Microsoft Cloud revenues were $27.1 billion, up 22% (up 29% in cc) year over year, driven by healthy demand across commercial businesses.
Business weakened in December, including in growth of consumption of Azure cloud services. During that month, growth in new business was lower than management had expected for Microsoft 365 productivity software subscriptions, Windows Commercial products and Enterprise Mobility and Security offerings.
Microsoft Corporation Price, Consensus and EPS Surprise
Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote
Segmental Details
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32.2% to total revenues. Revenues increased 7% (up 13% at cc) on a year-over-year basis to $17 billion.
Office Commercial products and cloud services revenues increased 7% (up 14% in cc), driven by Office 365 Commercial revenue growth of 11% (up 18% in cc). Continued momentum in the small and medium businesses, as well as in frontline worker offerings, drove top-line growth.
Office Consumer products and cloud services revenues decreased 2% (up 3% in cc). Microsoft 365 Consumer subscribers grew to 63.2 million in the reported quarter, up 12% year over year.
Dynamics revenues grew 13% and 20% in cc because of Dynamics 365, which grew 21% and 29% in constant currency.
LinkedIn revenues increased 10% and 14% in cc, driven by growth in Talent Solutions partially offset by weakness in Marketing Solutions from the advertising trends.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 40.8% to total revenues. The segment reported revenues of $21.5 billion, up 17.8% (24% at cc) year over year.
Server product and cloud services revenues rallied 20% year over year (up 26% at cc). Azure and other cloud services revenues grew 31% and 38% in cc. Growth continued to moderate particularly in December. Microsoft exited the quarter with Azure cc growth in the mid-30s.
The enterprise mobility and security installed base grew 16% to over 241 million seats with impact from the slowdown in growth of new business.
Enterprise service revenues increased 2% (up 7% at cc) in the reported quarter owing to growth in Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 27% to total revenues. Revenues decreased 18.8% year over year (down 16% at cc) to $14.2 billion due to a decline in Windows, partially offset by growth in Search and news advertising.
Windows commercial products and cloud services revenues decreased 3% year over year (up 3% at cc), primarily due to the slowdown in growth of new business in standalone offerings.
Windows OEM revenues were down 39% year over year due to a deteriorating PC market. Excluding the impact from the Windows 11 deferral last year, revenues declined 36% on a strong prior year comparable.
Search and news advertising revenues, excluding traffic acquisition costs increased 10% (up 15% at cc), driven by higher search volume and Xandr.
Gaming revenues declined 13% and 9% at cc. Xbox hardware revenues decreased 13% (down 9% at cc). Xbox content and services revenues decreased 12% (down 8% at cc) due to a decline in first-party content.
Operating Results
Gross profit increased 1.4% year over year to $35.2 billion. The gross margin contracted 40 basis points (bps) to 66.8% on a year-over-year basis.
Microsoft cloud gross margin increased roughly 2 points year over year to 72%. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased roughly 1 point due to a sales mix shift to Azure.
Operating expenses increased 18.7% year over year (up 13% at cc) to $14.8 billion. Operating expense growth was driven by investments in cloud engineering, the Nuance acquisition and LinkedIn.
The software maker took $1.2 billion charge in the quarter in connection with its decision to eliminate 10,000 employees. The charge includes $800 million in employee severance costs.
Operating income was $20.4 billion GAAP and $21.6 billion non-GAAP, decreased 8% and 3% on a year-over-year basis, respectively. The GAAP operating margin contracted 430 bps on a year-over-year basis to 38.7%.
Productivity & Business Process operating income rose 6.3% to $8.17 billion. Intelligent Cloud operating income increased 7% to $8.9 billion. More Personal Computing operating income declined 46.8% to $3.3 billion.
Balance Sheet & Cash Flow
As of Dec 31, 2022, Microsoft had total cash, cash equivalents and short-term investments balance of $99.5 billion comparing with $107.2 billion as of Sep 30, 2022.
As of Dec 31, 2022, long-term debt (including the current portion) was $48 billion compared with $48.5 billion as of Sep 30, 2022.
Operating cash flow during the reported quarter was $11.1 billion compared with $23.1 billion in the previous quarter. Free cash flow during the quarter was $4.9 billion compared with $16.9 billion in the prior quarter.
In the reported quarter, the company returned $9.7 billion to shareholders in the form of share repurchases ($5.4 billion) and dividends payouts ($5.06 billion).
Guidance
For the fiscal third quarter, Microsoft expects cost of goods sold to grow between 1% and2% in cc or to be between $15.65 billion and $15.85 billion and operating expenses to grow between 11% and12% in cc or between $14.7 billion and $14.8 billion.
Other income and expense are expected to be roughly $200 million as interest income is likely to more than offset interest expense, per company guidance. The company expects Q3 effective tax rate to be between 19% and 20%.
For the fiscal third quarter, Microsoft expects revenue growth in the productivity and business processes segment between 11% and 13% in cc to a range of $16.9-$17.2 billion. Microsoft expects Office 365 revenue growth to be sequentially lower by roughly one point in cc. In on-premises business, revenues are expected to decline in the mid-20s range.
In Office consumer, Microsoft expects revenue growth in the low-single digits, driven by Microsoft 365 subscriptions.
For LinkedIn, the company expects mid-single digits revenue growth with continued strong engagement on the platform. In Dynamics, Microsoft expects revenue growth in the low to mid-teens driven by continued growth in Dynamics 365 which is now over 80% of total Dynamics revenues.
For Intelligent Cloud, Microsoft anticipates revenues in constant currency to increase between 17% and 19% to a range of $21.7-$22 billion. Microsoft warned that revenue growth from Azure, the cloud computing platform that has become one of the main engines of its business, would slow by 4 or 5 percentage points sequentially in the fiscal third quarter, leaving aside the effect of currency movements.
In on-premises server business, Microsoft expects revenues to decline low-single digits as demand for hybrid solutions is expected to be more than offset by unfavorable FX impact. Enterprise Services revenues are expected to decline low to mid-single digits due to Microsoft Consulting Services.
For more personal computing, the company projects revenues between $11.9 billion and $12.3 billion, pressured by the sharp decline in the personal computer market. The company sees Windows OEM revenues to decline in the mid-to-high 30s in line with the PC market.
Microsoft expects Xbox content and services revenues to decline in the low-single digits as growth in Xbox Game Pass subscriptions will be more than offset by lower monetization per hour in third-party and first-party content.
Post Q2 Developements
Microsoft's announcement follows news that the company is engaging in a multi-year, multi-billion-dollar investment in OpenAI in an attempt to better tackle competitors including Amazon (AMZN - Free Report) owned Amazon Web Services and Alphabet’s (GOOGL - Free Report) Google Cloud.
The investment is expected to help Microsoft further differentiate its cloud offerings from competitors like Amazon and Google. The company is also said to be bringing the technology to its Bing search engine, a move that could threaten Google’s search dominance.
This Zacks Rank #3 (Hold) company is also continuing in its effort to purchase video game giant Activision Blizzard for $69 billion. So far, the Federal Trade Commission, the U.K.’s Competition and Markets Authority and the E.U.’s European Commission have either lodged complaints about ,or are outright working to scuttle the deal. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.