To The Moon

Source: Google

On January 24, 2023, $Microsoft(MSFT)$ released its fiscal Q2 2023 financial results after the market closed.(October 1, 2022 - December 31, 2022)

Overall: Revenue growth slowed but still beat expectations. Revenue from its core business, intelligent cloud, remained relatively resilient, offsetting the impact of a strong dollar and a decline in the Personal Computingbusiness that helped the company beat expectations.

Here, I will explain it in three steps:

1. Performance of Microsoft's Q2 financial report in 2023.

2. The reason for the decline? -- Hot events.

3. Where is the "future" of Microsoft?

01 | Performance of Microsoft's Q2 financial report in 2023

Investors who are familiar with Microsoft (MSFT) know that there are three main parts of Microsoft's business: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Ⅰ.The IncomeStatement (Shows the “financial muscle” of a company)

Source: APP ECONOMY INSIGHTS

Revenue rose 2% Y/Y to $52.7 billion, $450 million below consensus (and 7% at neutral exchange rates).

Productivity and Business Processes grew 7% Y/Y to $17 billion (13% at neutral exchange rates).

Office business products and cloud services revenue grew 7% Y/Y (At a neutral exchange rate, it was up 14% Y/Y).

Office consumer products and cloud services revenue fell 2% Y/Y( 3% Y/Y at neutral exchange rates).

LinkedIn's revenue grew 10% Y/Y (At a neutral exchange rate, it was up 14% Y/Y).

Dynamic's product and cloud services revenue grew 13% Y/Y. (20% Y/Y at neutral exchange rates)

Intelligent Cloud grew +18% Y/Y to $21.5 billion (24% at neutral exchange rates).

Revenue from server products and cloud services grew 20% Y/Y (At neutral exchange rates, it was + 26% Y/Y)

More Personal Computing fell -19% to $14.2 billion. (-16% Y/Y at neutral exchange rates)

Windows OEM revenue was down 39% Y/Y.

Windows Business products and cloud services revenue -3% Y/Y. ( +3% Y/Y at neutral exchange rates)

Xbox content and services revenue fell 12% Y/Y . (At a neutral exchange rate, it was down 8% Y/Y)

Search and news advertising revenue rose 10% Y/Y. (At a neutral exchange rate, it was +15% Y/Y)

Equipment revenue fell 39% Y/Y. (At a neutral exchange rate, it was -34% Y/Y)

*Nearly half of Microsoft's sales come from overseas, and the rising dollar has cut into Microsoft's revenue. Therefore, neutral exchange rate is the performance data excluding exchange rate factors.

Gross margins were 67% (-10% Y/Y and -2% Q/Q)

Operating margins were 39% (-10% Y/Y and -4% Q/Q)

non-GAAP EPS was $2.32 (-6% Y/Y)

Ⅱ.The Balance Sheet (Shows the skeleton of a company)

Cash and cash equivalents: $100 billion.

Long-term debt and leases: $71 billion.

Ⅲ. Cash flow Statement (The company's blood circulation system)

Operating cash flow was $11.2 billion (Profit margin is 21%, -7% Y/Y)

After reading the above data, let me give a simple interpretation:

1. Microsoft's total revenue in Q2 2023 was $52.7 billion, +2% Y/Y and the lowest in the last six fiscal years. In addition, both gross and operating margins are in decline.

2. In terms of the performance of core businesses, Productivity and Business Processes and Intelligent Cloud are relatively impressive, withyear-on-yeargrowth of 13% and 24% respectively under neutral exchange rate. In line with guidance.

3. Worst of all is Microsoft's personal computing business. Windows, Xbox, Surface and search advertising contributed $14.24 billion in fiscal Q2, down 19% Y/Y (Wall Street analysts were expecting a 16% decline). However, Windows OEM for PC device makers was down 39% year-over-year. (A 15% decline from the fiscal first quarter was worse).

Tips: Research firm Gartner recently reported that growth in the global PC business hit its lowest level on record in the fourth quarter of 2022.

As a result, Microsoft's three core businesses -- Productivity and Business Processes and Intelligent Cloud -- continue to evolve. The Personal computing business performed relatively poorly.

02 | The reason for the decline? -- Hot events

Many investors may be wondering what's causing Microsoft's current weakness. Let me summarize some of the key recent events for Microsoft.

Ⅰ. Global layoffs

Source: APP ECONOMY INSIGHTS

In the first month of 2023, Microsoft CEO Satya Nadella announced 10,000 job cuts in response to slowing business growth.

As you can see from the chart above, Microsoft hired 40,000 new employees in 2022 alone. The cuts represent nearly 5% of the 221,000 employees.

Ⅱ. The acquisition of $Activision Blizzard(ATVI)$ was halted

Source: Google

In December 2022, one of the largest technology acquisitions in US history was blocked by the Biden administration. The U.S. Federal Trade Commission (FTC) had sued to prevent Microsoft's $69 billion acquisition of video game publisher Activision Blizzard.

The deal could give Microsoft an unfair advantage, not only in consoles but also in new areas such as subscription and cloud gaming, the FTC said. This would ultimately hinder innovation in the emerging gaming market.

Currently, Microsoft management has not yet factored Activision Blizzard's expectations into its projections, but continues to expect the acquisition to be completed by June 2023.

Put all this together and it's easy to see how the slump in global demand PC has weighed on Microsoft's stock price in the short term. The impact of the layoffs and the suspension of the Activision Blizzard deal made the new year even more difficult for Microsoft.

03 | Where is the "future" of Microsoft?

Source: Google

Given the impact of the pandemic, declining performance, layoffs and acquisitions on hold, 2022 doesn't look very friendly for Microsoft. What can we expect from Microsoft in 2023?

Perhaps Microsoft's $10 billion stake in OpenAI is part of the answer.

In January 2023, Microsoft negotiated a $10 billion investment with OpenAI. In December 2022, OpenAI released the latest version of ChatGPT, which allows users to communicate with prompts, write text, and modify code.

The new version of OpenAI attracted more than a million users in the first five days of its release, and even Elon Musk, the world's richest man, called it "powerful" and "scary", tweeting that many people are "stuck in a freaking crazy ChatGPT loop."

Erik Brynjolfsson, professor of economics and information technology at Stanford College, believes ChatGPT will become a writing computer that improves our ability to write. But whether it can make Bing (3% market share) a serious competitor to Google (93% market share) in search is where Wall Street is focusing its attention.

What is clear is that Microsoft will do everything it can to secure its position as the leading AI provider among its big tech rivals. The growing partnership with OpenAI will greatly increase the user appeal of the new features in Microsoft's productivity apps and cloud services.

The boom in intelligent cloud and the billion-dollar investment in OpenAI demonstrate Microsoft's strong cash flow and ambition to dominate the market. If ChatGPT's technology is commercialized by Microsoft, competitors could enter the scene and grab the AI pie.

Here's what I believe: Microsoft is offering AI-enabled tools across its products and services, allowing users to subscribe over a long period of time. Leveraging this model will be necessary for Microsoft to succeed with its cloud infrastructure. Let us stay tuned!

If you have a different opinion about Microsoft, please leave it in the comment section and you will receive 20-50 tiger coins. You can also @Tiger_Academy ~

You can learn more about financial statement analysis by clicking on the course link: US Stock Financial Statements For Beginners