Microsoft Blames China Shutdown, Severance for Quarterly Earnings Miss

Microsoft joined a number of technology providers in blaming macroeconomic trends for lower-than-expected quarterly earnings.

The Redmond, Washington-based software giant on Tuesday unveiled its fiscal year fourth-quarter results. The company reported that commercial bookings grew 25%, and enterprise services grew by 5%. Total revenue ticked up from $46.2 billion a year ago to $51.9 billion year-over-year, setting a record for Microsoft. However, that number missed the analyst forecast of $52.4, CNBC reports.

It’s worth noting that product revenue was actually lower than it was a year ago, while service and other revenue increased by $6 billion. Profit was $16.7 billion. The increasing cost of revenue gave Microsoft a gross margin of $35.4 billion, up from $32.2 billion a year ago.

Microsoft’s Satya Nadella

“We see real opportunity to help every customer in every industry use digital technology to overcome today’s challenges and emerge stronger,” said Satya Nadella, chairman and chief executive officer of Microsoft. “No company is better positioned than Microsoft to help organizations deliver on their digital imperative — so they can do more with less.”

Macroeconomics

Microsoft in its quarterly earnings report cited multiple factors for missing expectations. First, the company noted an unfavorable foreign exchange rate movement. It also cited extended production shutdowns in China. According to Microsoft, the shutdowns, as well as a “deteriorating PC market,” impacted Windows OEM revenue by more than $300 million.

And then there’s that elephant in the room – Russia’s invasion of the Ukraine. The company said its decision to shrink its Russian operations led to $126 million in bad debt expense, asset impairments and severance.

Moreover, Microsoft said it spent $113 million in severance for non-Russian employees last quarter. The corporation cited a “strategic realignment of our business groups.”

Lastly, Microsoft said advertising spend on LinkedIn and Microsoft Search also decreased.

Segments

Revenue in Microsoft’s productivity and business processes ($16.6 billion) and intelligent cloud ($20.9 billion) segments both grew from the previous quarter. However, personal computing revenue dipped slightly from $14.5 billion to $14.3 billion.

Revenue for Office commercial products and cloud services grew by increased 9% year-over-year. Within that number, Office 365 commercial revenue grew 15%.

Enterprise support services revenue offset diminishing consulting services.

Microsoft reported its cloud revenue as $25 billion, which represented a 28% year-over-year increase. The company also noted that it landed the largest number of large cloud deals ever.

Microsoft’s Amy Hood

“In a dynamic environment we saw strong demand, took share, and increased customer commitment to our cloud platform,” said Amy Hood, executive vice president and chief financial officer of Microsoft. “… As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth.”

Nadella noted that Telstra will move its IT load to Azure.