A slump in PC demand coupled with a stagnating devices business and post-COVID gaming slowdown cut into Microsoft's revenue and profit, but its cloud computing unit drove growth, according to the company's second-quarter results released Tuesday.
In the quarter that ended Dec. 31, 2022, Microsoft's revenue grew to 52.7 billion, or 2% compared to the same time a year ago, falling short of analyst expectations of $52.9 billion. In the previous quarter, the Redmond-based tech giant's revenue increased 11% year over year — already considered a deceleration in growth compared to the previous five years.
Microsoft's profit dropped 12.6% from last year.
Microsoft's PC business decreased 19% in revenue, and its gaming unit's revenue decreased 12% compared to the same quarter a year ago. The company's advertising business, which analysts expected to drop, increased 10%. Its devices unit, which includes Microsoft Surface tablets and computers, dropped 39% from last year — one of the biggest falls reported in the quarter.
Despite the decrease in some units, Microsoft's cloud computing business grew 22% in revenue to $27.1 billion. Azure and other cloud services grew by 31% from last year.
"The next major wave of computing is being born, as the Microsoft Cloud turns the world's most advanced AI models into a new computing platform," said Satya Nadella, chairman and CEO of Microsoft.
The financial results were released less than a week after Microsoft announced layoffs. After cutting nearly 1,000 roles in October, the tech giant last week announced plans to lay off 10,000 workers globally, including at least 878 in Washington state. Some of the cuts were in its HoloLens unit as Microsoft is scaling back on a headset made for the U.S. Army that Congress declined to fund.
The number of total employees in December was 19% higher than the previous year, Microsoft's chief financial officer Amy Hood said in a call with investors. By the end of the 2023 fiscal year, Microsoft will have a "very moderated headcount growth," Hood said.
Job cuts and "changes to our hardware portfolio" led to a $1.2 billion charge in the quarter, Nadella said when the company announced the layoffs.
Days after disclosing the layoffs, Microsoft announced a "multiyear, multibillion dollar investment" in San Francisco-based OpenAI, the artificial intelligence startup that makes ChatGPT and other tools that write text and generate images through an AI engine.
Microsoft is a returning investor in OpenAI. And with the investment, it is the sole cloud provider for the startup, Nadella said. The agreement is the third stage of a four-year partnership with the startup that began with a $1 billion investment. Microsoft's investment in AI puts the tech giant in a strong position in the growing technology. It also contrasts with Google's disinvestment when Google announced layoffs and cuts in its AI unit last week.
"Every app is going to be an AI app," Nadella said. "The next big platform wave, as I said, is going to be AI and be strong." He added AI will be incorporated in more Microsoft products as the technology continues to develop. The company reportedly is planning to add AI to its search engine Bing.
Throughout the second quarter, Microsoft also faced a setback when the Federal Trade Commission filed a suit to block the tech giant's $69 billion acquisition of gaming studio Activision Blizzard, claiming it was anticompetitive. Microsoft filed a rebuttal saying the deal wouldn't hurt competition, and said it would continue to push for approval with the FTC through the commission's internal court.
According to Morningstar analyst Dan Romanoff, the health of Microsoft's gaming business unit doesn't hinge upon the acquisition. But, he said, he expects the deal to close "even if more concessions are required." In order to get the deal approved, Microsoft announced Activision's most popular game Call of Duty would be available on Nintendo consoles for 10 years.
Microsoft said the declining revenue in its gaming business will likely continue. "We expect Xbox content and services revenue to decline," Hood said.
