All eyes on Microsoft's Azure, Cloud numbers in Q1 FY'23

Tough foreign exchange rates, high energy costs and ongoing inflation woes mean not just Microsoft's customers, but the company itself will need to 'do more with less' in the coming year.
Written by Mary Jo Foley, Senior Contributing Editor
Credit: ZDNET

More than half of Microsoft's $50.1 billion in revenues ($25.7 billion) for Q1 FY'23 came from the "Microsoft Cloud." But Wall Street wasn't happy with Azure's 35 percent growth, year-over-year for the quarter, nor for projections that Azure revenues will be down five points sequentially in Q2.

(The Microsoft Cloud, formerly known as the Microsoft Commercial Cloud, is a company-created bucket of services which includes Microsoft 365/Office 365, Azure, Dynamics, some LinkedIn services and other business-centric cloud services.)

But Azure and the Microsoft Cloud look good compared to what's happening in the "More Personal Computing" segment -- Windows, Xbox and gaming and Search/Advertising. Windows OEM revenues declined 15 percent in the quarter. And for Q2, Chief Financial Officer Amy Hood said to expect Windows license revenues to be down further -- in the high 30 percent range -- especially given the strong prior year comparable. She said devices revenue also will decline approximately 30 percent next quarter, in line with the PC market. 

Officials said $800 million worth of increased energy costs projected for FY'23 contributed to the 14 percent decline in net income, to $17.6 billion, or $2.35 per share, and to lower Azure margins. But inflation and a strong dollar also played big into the decline, given that Microsoft generates nearly half of its revenues from overseas sales. 

Hood emphasized that Microsoft is continuing to land large, long-term deals for Azure. Sales of Microsoft 365/Office 365 Dynamics were strong in the quarter. Microsoft's most expensive and feature-rich Microsoft 365 plan, E5, comprised 12 percent of the total mix last quarter. Microsoft didn't provide an update on E5 growth, other than to say more than half of the $10-million-plus Microsoft 365 bookings in the quarter came from E5. Hood said that Microsoft has been adding more functionality to its E3 SKU, but that the company needs to do a better job in landing the value of E3.

"In this environment it is more critical than ever to continue to invest in our strategic growth markets such as Cloud, Security, Teams, Dynamics 365, and LinkedIn where we have opportunities to continue to gain share as we provide problem-solving innovations to our customers," Hood said.

Some other stats Microsoft released during its Q1 FY'23 call worth noting:

  • The company says it has 8,500 Azure Arc hybrid-management customers, which is double the number a year ago.
  • GibHub is now generating $1 billion in annual recurring revenue, four years after Microsoft's acquisition of the company. Microsoft says more than 90 million developers are using the service.
  • Power Apps has nearly 15 million monthly active users, up 50 percent from a year ago. Power Automate has more than 7 million monthly active users, Microsoft says.
  • Microsoft Viva has more than 20 million monthly active users.
  • Netflix will launch its ad-supported subscription plan in November, powered by Microsoft's advertising platform.
  • PC Game Pass subscriptions were up 159 percent year over year and Xbox hardware revenue grew 13 percent. Xbox content and services declined three percent.
  • Headcount growth from Q1 to Q2 will be minimal, with plans to move people around to focus on the company's top priorities.

Microsoft made some adjustments to the way it reports revenue in September. Revenue from HoloLens is now in the More Personal Computing, not the Intelligent Cloud segment, reflecting a reorg which saw the HoloLens team cleaved in two. Microsoft also added PC accessories, along with HoloLens, to its Surface revenue growth metric, which is now known as "Devices revenue growth." GitHub cloud revenue was removed from Server products to Azure and is now counted in the "Microsoft Cloud" total. And Windows 365 revenue also is now part of Azure instead of Windows commercial.

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