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Microsoft anticipates $3.3bn savings by extending server life

Thanks to new software tools and better hardware, Microsoft plans to upgrade servers and network equipment every six years

Microsoft has reported revenue of $51.9bn for the quarter ended 30 June 2022, an increase of 12% compared to the same quarter last year.

Behind the headline figures, the company has made changes to the way it depreciates datacentre equipment, which will see it extend the life of network and server equipment by 50% from four to six years. These changes will have an immediate positive impact of $1.1bn during the next quarter. 

The company’s fourth-quarter 2022 results were influenced heavily by the macro-economic climate and the war in Ukraine, with Microsoft stating that the extended production shutdowns in China and ongoing war in Ukraine have affected revenue.

“With the ongoing war in Ukraine, we made the decision to significantly scale down our operations in Russia. As a result, we recorded operating expenses of $126m related to bad debt expense, asset impairments and severance,” Microsoft said.

In spite of these setbacks, Microsoft’s public cloud offerings appears to be growing well – so much so that Satya Nadella, chairman and chief executive officer of Microsoft, claimed that Microsoft is in the best position to help organisations deliver on their digital imperative to enable them to do more with less.

“We see real opportunity to help every customer in every industry use digital technology to overcome today’s challenges and emerge stronger,” he said.

The company reported 25% growth in commercial bookings in its cloud business. Overall, Microsoft stated revenue of $25bn in its cloud business, up 28% year over year (YoY). Its Azure and other cloud services business reported growth of 40%, the Dynamics 365 business grew revenue by 31%, and LinkedIn reported revenue of 26%.

During the earnings, CFO Amy Hood discussed how Microsoft was working towards extending the life of its datacentre equipment, which will result in a “favourable” impact on operating income. She said Microsoft was extending the life of its server and network equipment assets from four to six years. 

In a transcript of the earnings call posted on Seeking Alpha, she said: “Investments in our software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, have resulted in lives extending beyond historical accounting...This change only impacts the timing of depreciation expense in the future for these assets.

“As a result, based on the outstanding balances as of June 30, we expect fiscal year ’23 operating income to be favourably impacted by approximately $3.7bn for the full fiscal year, and approximately $1.1b in the first quarter.”

Looking at the company’s on-premise server software business, Hood said she expects revenue to decline, driven by strong demand for Microsoft’s hybrid offerings. Licence revenue for PC manufactured with Windows pre-installed decreased 2% YoY. “Despite the deteriorating PC market, we saw share gains again this quarter and volumes remained above pre-pandemic levels,” Hood added.

When asked about how macroeconomic conditions were affecting Azure, Nadella discussed how the company was focused on trying to convince organisations that Azure helps them lower costs. “Moving to the cloud is the best way to shape your spend with demand uncertainty,” he said.

Nadella also mentioned that Microsoft was looking at optimising customer bills. “We are even our own field [staff] to ensure that the bills for our customers come down. And that, in fact, even shows up in some of the volatility in our Azure numbers because that’s one of the big benefits of the public cloud. That’s why, I think, coming out of this macro-economic crisis, the public cloud will be even a bigger winner because it does act as a deflationary force.”

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