In this Microsoft earnings call summary, we summarize key metrics and topics discussed on the Q2 2023 call, including:
- Earnings Call Summary
- Revenue Highlights
- Profitability
- Industry Trends
- New Initiatives
- Mergers & Acquisitions (M&A)
- Key Partnerships
- Upcoming Product Launches
- Guidance
- Caller Q&A
This earning call summary was partially done by our GPT-3 enabled earnings call assistant, which you can learn more about here.
Earnings Call Summary
Microsoft held its Fiscal Year 2023 Second Quarter Earnings Conference Call on January 24th, 2023.
On the call were Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Deputy General Counsel.
A few key highlights include:
- Microsoft reported a revenue of $52.7 billion, up 2% and 7% in constant currency.
- Gross margin dollars increased 2% and 8% in constant currency, operating income decreased 3% and increased 6% in constant currency, and earnings per share was $2.32.
- Cash flow from operations declined 7% and free cash flow declined 16%.
- Other income and expense was negative $60 million, lower than anticipated, driven by a mark-to-market loss on a forward share purchase agreement.
- Microsoft returned $9.7 billion to shareholders through share repurchases and dividends.
The company discussed certain non-GAAP items and provided clarifying items to aid investors in further understanding the company's second quarter performance.
Microsoft also discussed the impact of the COVID-19 pandemic on its business, and the cost savings and investments it has made to adjust to the changing environment.
The company also discussed its focus on margins, prioritization, and investments into areas with high return. Microsoft provided its outlook for the third quarter of Fiscal Year 2023, which is on a U.S. dollar basis.
The company also discussed the expense actions it announced last week, and the criteria it considers in making these decisions.
Overall, Microsoft reported a successful second quarter, despite the challenges posed by the COVID-19 pandemic. The company is confident in its cost structure and is well-positioned to continue to grow and succeed in the future.
Revenue Highlights
This quarter, the revenue was reported to be $52.7 billion, up 2% and 7% in constant currency.
When adjusted for the charge, gross margin dollars increased 2% and 8% in constant currency, operating income decreased 3% and increased 6% in constant currency, and earnings per share was $2.32.
This quarter's revenue was driven by the Commercial business, which grew 20% on a constant currency basis in H1. Additionally, the Intelligent Cloud segment reported revenue of $21.5 billion, increasing 18% and 24% in constant currency. Overall, this quarter's revenue was strong and showed growth in both the Commercial and Intelligent Cloud segments.
Profitability
This quarter, Microsoft reported a net income of $14.8 billion. Adjusted for the charge, gross margin dollars increased 2% and 8% in constant currency, operating income decreased 3% and increased 6% in constant currency, and earnings per share was $2.32.
The Q2 charge negatively impacted gross margin by $152 million, operating income by $1.2 billion, and earnings per share by $0.12. Microsoft's effective tax rate was approximately 19%.
The company returned $9.7 billion to shareholders through share repurchases and dividends. Overall, Microsoft's profitability this quarter was slightly lower than expected due to the Q2 charge, but the company still reported strong earnings.
Industry Trends
This quarter, the PC market returned to pre-pandemic levels, but with customers exercising caution in their spending.
They saw strong growth in our commercial business, but execution challenges impacted our Surface business. They also saw moderated consumption growth in Windows OEM and devices, as well as a slight decline in advertising spend.
Customers are optimizing their digital spend and turning to advanced AI models to create a new computing platform. They are seeing customers adopt our E5 suite for its security, analytics, and voice capabilities.
New Initiatives
This quarter, Microsoft introduced their new Supply Chain Platform, helping customers like iFit and Kraft Heinz apply AI to predict and mitigate disruptions.
Additionally, Microsoft announced their partnership with Nuance and Xandr, which will help them turn the world's most advanced AI models into a new computing platform.
Finally, Microsoft also announced their new Industry Solutions, which will help businesses digitize their service, finance, customer experience, and supply chain functions.
Mergers & Acquistions (M&A)
This quarter, Microsoft completed two acquisitions: Nuance and Xandr. Nuance is a speech recognition technology company, and Xandr is an advertising technology company.
The acquisitions are expected to help Microsoft expand its AI capabilities and strengthen its advertising business.
Microsoft also announced a Q2 charge of $1.2 billion related to the acquisitions, which negatively impacted gross margin by $152 million, operating income by $1.2 billion, and earnings per share by $0.12.
Key Partnerships
This quarter, Microsoft announced a new partnership with London Stock Exchange Group to deliver next generation data analytics and workspace solutions.
Additionally, Microsoft announced a new partnership with G&J Pepsi-Cola Bottlers to move from reactive to predictive field service. Finally, Microsoft announced a new Supply Chain Platform to help customers like iFit and Kraft Heinz apply AI to predict and mitigate disruptions.
These partnerships demonstrate Microsoft's commitment to helping customers digitize their service, finance, customer experience, and supply chain functions.
Upcoming Product Launches
Microsoft discussed the upcoming version launch of ChatGPT, which is being built on Azure and has seen tremendous traction. They also discussed the value of the suite sale, which has been seen in strong E5 performance, ARPU growth, and consistency in renewal rate and Microsoft 365 performance.
Additionally, Microsoft discussed the impact of their cost structure on their financial results, and the need to show cost savings. Finally, they discussed the potential for competitive differentiation in their Microsoft solutions through leading in AI.
Guidance
Microsoft provided guidance for the full year and for Q3. They expect to see a deceleration in H2 in their Commercial business, and higher energy costs for the full year are now expected to be $500 million compared to their previous estimate of $800 million.
They also anticipate Q4 operating expense growth to be in the low single digits, and cash flow from operations to decline 7% and free cash flow to decline 16%. Finally, they expect their effective tax rate to be approximately 19%.
Caller Q&A
One question was about headcount for the remainder of the year and the possibility for further expense actions, if necessary.
Amy Hood answered that they would have moderated headcount growth on a year-over-year basis in addition to some of the prioritization decisions they have made.
Another question was about the visibility of Azure customer ramps and if any of those projects were getting put on pause.
Amy Hood answered that they had seen some slowing this quarter and were guiding to some slowing next quarter in Cloud and Azure, but that they believed it was mostly people optimizing what they had already bought and stepping the money back into new projects.
As always, none of this is financial advice, do your own research, and see our full terms and conditions for more.
