Microsoft's Cloud Strength Offsets Q4 Earnings Miss

The confluence of multiple worldwide crises in the tail end of Microsoft's fiscal 2022 has resulted in a relatively tepid fourth quarter earnings report.

Microsoft's revenue for the quarter ended June 30 increased by 12% year over year to $51.9 billion, missing Wall Street's projection of $52.4 billion. Earnings per share of $2.23 also missed analyst estimates of $2.29.

For the full fiscal year, Microsoft earned a total of $198.3 billion in revenue, an increase of 18% over FY21.

Microsoft attributed its relatively slow growth in Q4 to several factors. For instance, in March, Microsoft announced it was halting all new sales in Russia in response to that country's aggression toward Ukraine. That move cost Microsoft "$126 million related to bad debt expense, asset impairments, and severance," the company said in its earnings report. Revenue from Windows PC sales also took a $300 million hit as a result of pandemic-related shutdowns in China "and a deteriorating PC market in June."

Microsoft also cited "unfavorable foreign exchange rate movement within the quarter" as a reason for the misses in revenue and earnings per share.

However, as it usually is, Microsoft's cloud business was a strong point of the quarter, cushioning the company against worse results. "In a dynamic environment we saw strong demand, took share, and increased customer commitment to our cloud platform," said Microsoft chief financial officer Amy Hood in a prepared statement. "Commercial bookings grew 25% and Microsoft Cloud revenue was $25 billion, up 28% year over year."

The Q4 figures for Microsoft's Intelligent Cloud business indicate predictably strong growth. Revenue driven by "Azure and other cloud services" was up 40% year over year, and "server products and cloud services" revenue was up 22% year over year. Overall, Intelligent Cloud drew $20.9 billion in revenue, a year-over-year increase of 20%.

In an earnings call, Hood said Microsoft expects the Intelligent Cloud's momentum to carry into fiscal year 2023. "For Intelligent Cloud, we expect revenue to grow between 25% and 27% in constant currency or U.S. $20.3 billion to U.S. $20.6 billion. Revenue will continue to be driven by Azure," she said during the call, according to a Seeking Alpha transcript. "Azure revenue will continue to be driven by strong growth in consumption, and our per-user business should continue to benefit from Microsoft 365 suite momentum, although we expect moderation in growth rates, given the size of the installed base."

Other highlights from Microsoft's Q4 report include:

  • Revenue in Productivity and Business Processes was $16.6 billion and increased 13% (up 17% in constant currency), with the following business highlights:
    • Office Commercial products and cloud services revenue increased 9% (up 13% in constant currency) driven by Office 365 Commercial revenue growth of 15% (up 19% in constant currency)
    • Office Consumer products and cloud services revenue increased 9% (up 12% in constant currency) and Microsoft 365 Consumer subscribers grew to 59.7 million
    • LinkedIn revenue increased 26% (up 29% in constant currency)
    • Dynamics products and cloud services revenue increased 19% (up 24% in constant currency) driven by Dynamics 365 revenue growth of 31% (up 36% in constant currency)
  • Revenue in More Personal Computing was $14.4 billion and increased 2% (up 5% in constant currency), with the following business highlights:
    • Windows OEM revenue decreased 2%
    • Windows Commercial products and cloud services revenue increased 6% (up 12% in constant currency)
    • Xbox content and services revenue decreased 6% (down 4% in constant currency)
    • Search and news advertising revenue excluding traffic acquisition costs increased 18% (up 21% in constant currency)
    • Surface revenue increased 10% (up 15% in constant currency)

Despite the current climate, Microsoft's outlook for the next fiscal year is optimistic. "We continue to expect double-digit revenue and operating income growth in both constant currency and U.S. dollars," Hood said during the call. "Revenue growth will be driven by continued momentum in our commercial business and a focus on share gains across our portfolio."

Several Microsoft partners expressed similar optimism, particularly about Microsoft's cloud prospects. "Despite the series of labor shortages facing the technology industry, Microsoft had a solid earnings call today and the results exhibit the continued value of how Microsoft cloud will set its customers up to be more agile so that when the economy recovers, customers will be ready," said Tony Guidi, senior vice president of Strategic Partnerships at Core BTS, in an e-mailed statement.

Added Jared Cheney, vice president of Services at SoftwareONE, "Microsoft's solid earnings in the fourth quarter showcase the tech giant's continued push and high demand for Azure, cloud migration, and digital transformation capabilities. This increased demand, a significant driver of Microsoft's performance, is a sign of businesses looking into opportunities to optimize and add efficiencies to their stacks and properly allocate funding to take advantage of them."

Microsoft's stock was up over 6% on Wednesday afternoon.

About the Author

Gladys Rama (@GladysRama3) is the editorial director of Converge360.