Analysis: Microsoft’s F23Q2 (Premium)

Yesterday, Microsoft reported a mixed financial quarter in which revenues were up only 2 percent, thanks to its cloud business. Here’s a deeper dive into the quarter, with a focus on the client-side technologies that we care about the most.

First, the results: a net income of $16.4 billion on revenues of $52.7 billion for the quarter ending December 31. Net income decreased by 12 percent year-over-year (YOY) in the time period while revenue was up just 2 percent.

Microsoft has three primary business units, and after years in which they were all roughly even from a revenues perspective, it’s clear that Microsoft’s cloud-based businesses are starting to edge ahead of its legacy, on-premises, and client businesses. (Some temporary pandemic-era changes messed with that otherwise consistent behavior, but I feel like the post-pandemic hangover is working to put things back on track. Maybe even overcompensating in the short term.)

In the previous quarter, Microsoft’s biggest business was once again Intelligent Cloud, which consists of Microsoft Azure and the firm’s legacy server products. Intelligent Cloud delivered $21.5 billion in revenues in the quarter, up 18 percent YOY.

Productivity and Business Processes was Microsoft’s second-biggest business in the quarter, with $17 billion in revenues, up 7 percent. This business contains most of Microsoft/Office 365 (minus the Windows bits), LinkedIn, and Dynamics.

And then we have the horribly-named More Personal Computing, which was again the laggard with $14.2 billion in revenues, down an astonishing 19 percent YOY. This business includes Windows, Xbox, and devices (most Surface, but also HoloLens and peripherals). And given how the economy and the PC market went in late 2022, it’s perhaps not surprising that this is where most of the problems were.

It’s also worth mentioning a made-up business that Microsoft likes to promote called Microsoft Cloud, which is a moving target of cherry-picked cloud businesses that changes from quarter to quarter (or can). Microsoft Cloud is there to remind Wall Street how effectively Microsoft’s cloud businesses compete against Amazon AWS, and it delivered $27.1 billion in the quarter, up 22 percent! Literally incredible.

I’m not super-interested in Microsoft’s cloud businesses and I’m no fan of its use of a Microsoft Cloud metric. But it is fair to point out that Microsoft’s cloud businesses saved the day in the previous quarter: had those products not done so well, Microsoft would have experienced a YOY revenue drop. But thanks to its cloud pivot, the quarter instead delivered Microsoft’s slowest growth in over 6 years. In these trying times, that’s what success looks like. Or at least diversification.

This brings me to the Microsoft products and services that I---and, I think, you---care about the most: the client-side products and services that are used by individuals, often consumers, and not the business prod...