Microsoft released its Q4 FY2022 results for the period ending June 30th. Revenue grew by 12% YoY to $51.9 billion (missed Wall Street analysts' estimates by 0.94%) and EPS came at $2.23 (missed estimates by 2.9%). The strong US dollar negatively impacted the revenue by $595 million and EPS by $0.04. Net income grew by 2% YoY to $16.7 billion. Microsoft Cloud revenue grew by 28% YoY to $25 billion. The company’s results are good considering the various macro uncertainties, China lockdown, and the strong US dollar. FY2022 revenue grew by 18% YoY to $198.3 billion and net income increased by 19% YoY to $72.7 billion.
The company’s CEO Satya Nadella sounded more confident about the company’s prospects. He said, “In this environment, we are focused on 3 things: first, no company is better positioned than Microsoft to help organizations deliver on their digital imperative so that they can do more with less. From infrastructure and data to business applications and hybrid work, we provide unique differentiated value to our customers. Second, we will invest to take share and build new businesses in categories where we have long-term structural advantage. Lastly, we will manage through this period with an intense focus on prioritization and executional excellence in our own operations to drive operational leverage.”
The company’s gross income increased 10% YoY to $35.4 billion. The gross margin was 68.3% when compared to 69.7% in the same period last year. Excluding the impact from the change in the accounting estimate, the gross margin was relatively unchanged.
The operating income increased by 8% YoY to $20.5 billion. The operating margin was 39.6% compared to 41.4% in the same period last year. Excluding the impact from the change in the accounting estimate and FX, the operating margin would be relatively unchanged.
The company’s cash flows continued to be strong in the recent quarter. Cash from operations grew by 8% YoY to $24.6 billion (47% of revenue) and free cash flow increased by 9% YoY to $17.8 billion (34% of revenue). The company has cash and investments of $104.8 billion and debt of $49.8 billion.
Segment results:
The Productivity and Business Processes revenue grew by 13% YoY to $16.6 billion. This was in line with the midpoint of the management’s guidance given in June. The Office Commercial revenue grew by 9% and Office 365 commercial revenue grew by 15%. Dynamics revenue grew by 19%, which was helped by Dynamics 365 growth of 31%. It was slightly below the management’s growth expectation. LinkedIn revenue increased by 26%, which was lower than the management’s expectation due to the slowdown in advertising revenues.
The operating income of this segment increased by 12% YoY to $7.2 billion. The segment accounts for 32% of the total revenue and 35% of the group’s total operating income. The management expects the Productivity and Business Processes segment revenue to be $16.1 billion at the mid-point of the guidance in the next quarter.
The Intelligent Cloud segment revenue grew by 20% YoY to $20.9 billion. The management’s guidance was $21.05 billion, the negative impact from the strong dollar led to the slight miss in this segment. The server products and cloud services revenue grew by 22% helped by Azure & other cloud services growth of 40%. On a constant currency basis, Azure grew by 46% and the management is guiding for a growth of 43% in the next quarter. Google Cloud revenue in the recent quarter grew by 36% YoY to $6.3 billion.
Some of the key wins in the recent quarter include American Airlines that chose the company’s cloud platform to run its operations. Telecommunications company, Telstra will use Microsoft Azure for its internal IT workloads. The operating income increased by 11% YoY to $8.7 billion. The segment accounts for 40% of the group’s total revenue and 42% of the total operating income. Intelligent Cloud revenue is expected to be $20.45 billion in the next quarter.
The More Personal Computing revenue grew by 2% YoY to $14.4 billion. It was below the management’s guidance of $14.69 billion. The slowdown in this segment was expected since there is weakness in the PC business. Windows OEM revenue fell 2% and despite the deteriorating PC market the company witnessed some share gains. Surface revenue grew by 10%, which was helped by commercial sales. The gaming revenue declined 7% and was in line with the management’s expectations. The operating income fell by 5% to $4.6 billion. The segment accounts for 28% of the total revenue and 22% of the operating income. The management expects More Personal Computing revenue to be $13.2 billion.
Guidance
The management expects Q1 FY2023 revenue to grow 9.8% YoY at the mid-point of the guidance to $49.75 billion. The strong dollar and PC weakness might be the reason for the company to give a cautious guidance for the next quarter that was lower than the analysts' initial estimates. They expect FX headwinds to be higher in the first half of the fiscal year when compared to the second half.
They sound more optimistic on the full year guidance as they expect revenue to grow double digits for the full year. Amy Hood, CFO of the company said in the earnings call, “We continue to expect double-digit revenue and operating income growth in both constant currency and U.S. dollars.” The management guidance does not take into consideration the impact from the acquisition of Activision Blizzard which they expect to complete by the end of the fiscal year 2023.
The company also made an accounting change in the useful life for server and network equipment assets from four to six years which will extend the depreciation expenses for the company. Amy Hood said in the earnings call, “First, effective at the start of FY '23, we are extending the depreciable useful life for server and network equipment assets in our cloud infrastructure from 4 to 6 years, which will apply to the asset balances on our balance sheet as of June 30, 2022, as well as future asset purchases.
As a result, based on the outstanding balances as of June 30, we expect fiscal year '23 operating income to be favorably impacted by approximately $3.7 billion for the full fiscal year and approximately $1.1 billion in the first quarter.”
Conclusion
Microsoft is in a better position to withstand the macro challenges with stable revenue, consistent margins and the company’s strength in Microsoft Cloud. The company’s forward guidance for the next fiscal year looks positive. Despite PC’s weakness, the company’s other segments continue to grow. Notably, Microsoft Azure’s growth is very solid and outpaced Google Cloud.