Microsoft Falls Short of 4th Quarter Profit Targets, Blames China’s Lockdowns and Russia Sanctions

The French headquarters of American multinational technology company Microsoft Corp. are seen in Paris on March 6, 2018. Gerard Julien/AFP via Getty Images

Microsoft Corp.’s latest profits fell short of Wall Street expectations on July 26 after the company revealed that “evolving macroeconomic conditions and other unforeseen items” had impacted its financial results.

In its earnings report for the three months ending June 30 (the fourth quarter of the company’s 2022 fiscal year), the company founded by Bill Gates reported net income rising 2 percent to $16.7 billion.

Analysts expected Microsoft to generate a profit of $17.3 billion, but instead the company posted its lowest earnings growth in two years.

Microsoft had fourth-quarter revenue of $51.9 billion, up 12 percent from the same period in 2021, but that still fell short of the $52.4 billion expected by analysts, CNBC reported.

The company’s operating income was $20.5 billion, an increase of 8 percent, while earnings per share were $2.23, lower than the $2.29 per share as expected by analysts.

The software company based in Redmond, Washington, said the financial results were due in part to “unfavorable foreign exchange rate movement,” which had negatively impacted its revenue, as well as ongoing production shutdowns in China that continued through May amid a surge in COVID-19 cases.

The company also cited a “deteriorating PC market” in June.

Scaled Back Operations in Russia

Other reasons cited for the weak quarter included Russia’s ongoing invasion of Ukraine, which prompted Microsoft, along with a string of other companies, to significantly scale down its operations in Russia.

“As a result, we recorded operating expenses of $126 million related to bad debt expense, asset impairments, and severance,” Microsoft said.

Microsoft also said it spent $113 million in severance for non-Russian employees in the previous quarter, citing a “strategic realignment of our business groups.”

Microsoft is among a number of tech companies that have instituted hiring freezes and budget cuts amid fears of an impending recession.

Advertising spent on LinkedIn and Microsoft Search also shrunk, the company said.

Microsoft’s revenue from Azure and other cloud services fell short of expectations, growing by only 40 percent compared to analysts’ expectations of 43.4 percent.

Overall, demand for Azure and other cloud services remains relatively strong, though not as much as during the COVID-19 pandemic. Microsoft had reported that Azure revenue was up 50 percent in the second quarter of fiscal 2021.

Revenue from Intelligent Cloud services was $20.9 billion in the fourth quarter of 2022, an increase of 20 percent but still below expectations.

Microsoft reported a 6 percent drop in year-over-year sales growth for its Xbox gaming console content and services. These had boomed during the COVID-19 pandemic and subsequent lockdowns.

Investigation Into Merger

The United Kingdom’s Competition and Markets Authority (CMA) announced earlier in July that it was investigating Microsoft’s $75 billion acquisition of Activision Blizzard Inc.—a video game developer and publisher of interactive entertainment content—due to potential competition issues.

CMA said it was considering whether the takeover would lead to “substantial lessening of competition within any market or markets in the United Kingdom for goods or services.”

Microsoft returned $12.4 billion to shareholders in the form of share repurchases and dividends in the fourth quarter of the fiscal 2022, an increase of 19 percent compared to the fourth quarter of the fiscal 2021.

“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,” said Amy Hood, executive vice president and chief financial officer of Microsoft, in the company’s news release.

Despite falling short of market expectations, Microsoft expects its revenue for the first quarter of fiscal 2023 to land between $49.25 billion and $50.25 billion.

Shares of Microsoft Corp. were down 2.68 percent in after-hours trading on July 26.