Microsoft gateway sign at Redmond, Washington headquarters

Microsoft Reports Cloud Revenue Growth in Q4 FY22

Despite challenging macroeconomic circumstances and uncertainty

Yesterday, Microsoft reported its fourth quarter and year-end financials for fiscal year 2022. For the fourth quarter, Microsoft had revenue of $51.9 billion, a 12% increase year-over-year, driven by growth in Microsoft Cloud. The company also reported net income of $16.7 billion, or $2.23 diluted earnings per share. Revenue growth has slowed in comparison to the third quarter of fiscal year 2022.

During the earnings call, CEO Satya Nadella remained optimistic despite some global political and economic challenges impacting Microsoft.

“Amid this macroeconomic environment, the Microsoft Cloud surpassed $25 billion in quarterly revenue for the first time, up 28% and 33% in constant currency,” Nadella said. “When I talk with customers, it’s clear there is real opportunity to help organizations in every industry use digital technology to overcome today’s challenges and emerge stronger.”

Macroeconomic challenges impacting the company

In their July 26, 2022 news release, Microsoft highlighted recent events that have impacted the company’s financial results. They include:

  • Foreign exchange rates negatively impacted revenue by $(595) million and diluted earnings per share $(0.04).
  • Windows OEM revenue was impacted $(300) million due to extended production shutdowns in China that continued through May and a slowing PC market in June.
  • Advertising spending was down, having a negative impact on LinkedIn, Search and news advertising revenue of $(100) million.
  • Operations in Russia have been scaled down, costing the company $126 million in expenses for bad debt, asset impairments and severance pay.
  • The company’s strategic realignment generated $113 million in employee severance expenses, not including Russia.

Quarterly highlights

Despite the negative impacts, Microsoft saw growth across most categories during the fourth quarter of fiscal year 2022. Highlights include:

  • Revenue in Productivity and Business Processes was $16.6 billion, a 13% increase year-over-year.
  • Official Commercial products and cloud services revenue grew 9%, primarily due to Office 365 Commercial revenue growth of 15%.
  • LinkedIn revenue increased 26%.
  • Dynamics products and cloud services revenue grew 19%, driven by Dynamics 365 revenue growth of 31%.
  • Revenue in Intelligent Cloud was $20.9 billion, a 20% increase year-over-year. Server products and cloud services revenue increased 22%.
  • Revenue in More Personal Computing was $14.4 billion, a 2% increase year-over-year.
  • Windows OEM revenue decreased 2%.
  • Windows Commercial products and cloud services revenue increased 6%.
  • Xbox content and services revenue decreased 6%.
  • Search and news advertising, excluding the cost of traffic acquisition, grew 18%.
  • Surface revenue increased 10%.
  • Microsoft returned $12.4 billion to shareholders in share repurchases and dividend payments, a 19% increase year-over-year.

Fiscal year-end results

Microsoft reported the following highlights for fiscal year 2022:

  • Revenue of $198.3 billion, an 18% increase year-over-year
  • Operating income of $83.4 billion, a 19% increase year-over-year
  • Net income of $72.7 billion (GAAP), a 19% increase year-over-year
  • Diluted earnings per share of $9.65 GAAP, a 20% increase year-over-year

First quarter FY 2023 guidance

Microsoft offered the following guidance during the earnings call:

  • Continued weakness in the PC market and advertising spending
  • Microsoft Cloud gross margin percentage will be up approximately 2 points.
  • Capital expenditures will decrease.
  • Productivity and Business Processes will see a revenue increase of between 12% and 14%.
  • Intelligent Cloud will see revenue growth between 25% and 27%.
  • More Personal Computing revenue will grow between 1% and 4%.
  • Windows OEM revenue is expected to drop in the high single-digits, and Surface revenue will decline in the low-single digits.

“In closing, we continue to see strong demand for our products and services and increased commitment to our platform as we remain focused on delivering compelling customer value in this dynamic environment resulting in continued share gains. As we manage through this period, we will continue to invest in future growth while maintaining intense focus on operational excellence and execution discipline,” said Amy Hood, chief financial officer.

Insider Take

Microsoft is not immune to macroeconomic and political pressures felt around the world. While there was a period of prosperity during the pandemic as companies pivoted to remote work, the war in Ukraine, inflation and other political and economic factors are impacting everyone. They contributed to Microsoft’s strategic realignment and to their slowing growth in certain segments of the company. Microsoft still has many strengths, but like everyone else, they have to steel themselves against an uncertain economic future.

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