Microsoft (MSFT) reported its fiscal Q2 earnings after the closing bell on Tuesday. It beat analysts’ expectations with its cloud services revenue jumping 46%.
The announcement comes just a week after the Redmond, Washington-based tech giant made headlines with the news. It will acquire troubled gaming behemoth Activision Blizzard (ATVI) for $68.7 billion.
Microsoft is the first of the biggest US tech companies to report quarterly earnings with Apple, Amazon, Meta, and Alphabet to come. The reports are being closely watched after Netflix’s share price collapsed following the release of disappointing subscriber numbers.
“Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life,” said Nadella.
“As tech as a percentage of global GDP continues to increase, we are innovating and investing across diverse and growing markets, with a common underlying technology stack and an operating model that reinforces a common strategy, culture and sense of purpose.”
Financial Highlights
- Revenue increased by $8.7 billion or 20% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue increased driven by Windows and Search and news advertising.
- Cost of revenue increased $2.8 billion or 19% driven by growth in Microsoft Cloud.
- Gross margin increased $5.9 billion or 20% driven by growth across each of our segments.
- The gross margin percentage was relatively unchanged. Excluding the impact of the change in accounting estimate for the useful lives of our server and network equipment, the gross margin percentage increased by 2 points driven by improvements in More Personal Computing and Productivity and Business Processes.
- Microsoft Cloud’s gross margin percentage decreased slightly to 70%. Excluding the impact of the change in accounting estimate, Microsoft Cloud’s gross margin percentage increased 3 points driven by improvement across our cloud services, offset in part by a sales mix shift to Azure and other cloud services.
- Operating expenses increased $1.5 billion or 14% driven by investments in cloud engineering, Gaming, LinkedIn, and commercial sales.
Hood said the company expects revenue of $48.5 billion to 49.3 billion in the fiscal third quarter, topping the $48.23 billion Refinitiv consensuses. Hood said the company now expects full-year operating margins to widen slightly.
Microsoft said sales of Windows licenses increased by 25% in the fourth quarter of 2021. Technology industry research firm Gartner estimated that PC shipments had fallen 5%.
Nadella said the company generated $15 billion in security revenue in 2021, up nearly 45% from the prior year. In 2020, security revenue increased more than 40%.
During the quarter, Microsoft released Windows 11 as the successor to Windows 10 and introduced the $249 Surface Laptop SE for school use that runs a special version of Windows 11.
Stock Movement
Year-to-date, Microsoft’s stock was down 12.7% as of midday Tuesday, while the broader S&P 500 was down 7.5%. Amazon, Microsoft’s biggest competitor in the all-important cloud space, was down more than 15.4%. Over the last 12 months. However, Microsoft’s stock price is up a whopping 29.9%, while the S&P 500 is up just 14.8%. Amazon’s shares are down 12.1%.
As of the close on Tuesday, the stock is down 14% since the start of 2022 and is on pace for its worst month since 2010. The slump has come alongside a broad selloff in technology stocks as investors brace for rising interest rates.