Microsoft reported second quarter 2023 financial results with only 2% increase in revenue to $52.7 billion, while net income was $16.4 billion decreasing 12%.

The dismissal of 10,000 employees announced a few days ago negatively impacted gross margin by $152 million, operating income by $1.2 billion and earnings per share by $0.12.

Operating income decreased 8% to $20.4 billion and diluted earnings per share was $2.20 GAAP, 11% decline. Cash flow from operations was $11.2 billion, down 23 percent year-over-year as strong cloud billings and collections were more than offset by a tax payment as well as higher employee and supplier payments. Free cash flow was $4.9 billion, down 43 percent year-over-year.

Microsoft Cloud revenue was $27.1 billion and grew 22 percent, ahead of expectations. Microsoft Cloud gross margin percentage increased roughly 2 points year-over-year to 72 percent, a point better than expected driven by lower energy costs.

″Consumer business, the PC market was in line with our expectations, but execution challenges impacted our Surface business. Advertising spend declined slightly more than expected, which impacted Search and news advertising and LinkedIn Marketing Solutions,″ said Amy Hood, Microsoft CFO.

Business Highlights

Revenue in Productivity and Business Processes was $17.0 billion and increased 7% (up 13% in constant currency), with the following business highlights:

• Office Commercial products and cloud services revenue increased 7% (up 14% in constant currency) driven by Office 365 Commercial revenue growth of 11% (up 18% in constant currency)

• Office Consumer products and cloud services revenue decreased 2% (up 3% in constant currency) and Microsoft 365 Consumer subscribers grew to 63.2 million

• LinkedIn revenue increased 10% (up 14% in constant currency)

• Dynamics products and cloud services revenue increased 13% (up 20% in constant currency) driven by Dynamics 365 revenue growth of 21% (up 29% in constant currency)

Revenue in Intelligent Cloud was $21.5 billion and increased 18% (up 24% in constant currency), with the following business highlights:

• Server products and cloud services revenue increased 20% (up 26% in constant currency) driven by Azure and other cloud services revenue growth of 31% (up 38% in constant currency)

Revenue in More Personal Computing was $14.2 billion and decreased 19% (down 16% in constant currency), with the following business highlights:

• Windows OEM revenue decreased 39%

• Windows Commercial products and cloud services revenue decreased 3% (up 3% in constant currency)

• Xbox content and services revenue decreased 12% (down 8% in constant currency)

• Search and news advertising revenue excluding traffic acquisition costs increased 10% (up 15% in constant currency)

• Devices revenue decreased 39% (down 34% in constant currency)

In the commercial business, Microsoft delivered strong growth in line with expectations. However, the company is seeing customers exercise caution in this environment, as the results weakened thru December.

″We saw moderated consumption growth in Azure and lower-than-expected growth in new business across the standalone Office 365, EMS, and Windows Commercial products that are sold outside the Microsoft 365 suite.″

Moving to Q3 outlook, Microsoft expects the foreign exchange impact to decrease total revenue growth by approximately 3 points and operating expense growth by 2 points.

Within the segments, there will be roughly 4 points of negative impact on revenue growth in Productivity and Business Processes, 3 points in Intelligent Cloud and 2 points in More Personal Computing.

In consumer business, Windows OEM and Devices will see continued declines as the PC market returns to pre-pandemic levels. And, LinkedIn and Search will be impacted as ad market spending remains a bit cautious.

In commercial business, the business trends that began at the end of December to continue into Q3

Microsoft returned $9.7 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2023, a decrease of 11% compared to the second quarter of fiscal year 2022.