Microsoft Announces Q3 FY 2017 Results

This week, Microsoft announced their earnings for the third quarter of their 2017 fiscal year. Despite missing some expectations in a few segments, Microsoft’s revenue was up 8% to $22.1 billion, and gross margin was up 10% to $14 billion, resulting in a gross margin of 64% for the quarter. Operating income was up 6% to $5.6 billion, and net income was up 28% to $4.8 billion, which resulted in earnings-per-share of $0.61, which is up 30% from the same time last year.

Microsoft also reports Non-GAAP results, which report earnings with constant currency reconciliations to equalize the strength or weakness of the USD versus global currencies, as well as Windows 10 revenue deferrals due to it including upgrade rights for the lifetime of the product, so rather than just counting the sale of a Windows license as a lump sum, it is now deferred. Microsoft will be switching to a new revenue standard to count Windows 10 sales up front in the future, but for now their revenue recognition practices require them to defer it. On a Non-GAAP basis, Microsoft earned $23.6 billion in revenue, up 6%, or 7% in constant currency (CC), had a gross margin of $15.5 billion, up 7% or 9% CC, which as a percentage of revenue is 66%, up 1% from a year ago. Operating income for the quarter was $7.1 billion, up 2%, or 5% CC, and net income was $5.7 billion, up 13%, or 16% CC. This resulted in diluted earnings per share of $0.73, up 16%, or 19% CC.

Microsoft returned $4.6 billion to shareholders this quarter, with $1.6 billion in share repurchases, and $3.0 billion in dividends. Microsoft had been buying back shares at an accelerated rate, but in the earnings call, announced they would be moving back to their more historic levels for share buybacks.

This is their first full quarter since the acquisition of LinkedIn, and LinedIn had revenues of $975 million. The cost of the revenue, thanks to amortization of assets from the acquisition, and other costs, was $396 million, and operating expenses from the amortization of assets from the acquisition and other operating expenses for LinkedIn was $965 million, meaning LinkedIn is currently a drag on the operating income of Microsoft at a cost of $386 million this quarter. LinkedIn results will be calculated in the Productivity and Business Process segment, but for now Microsoft is also breaking out the numbers on their own, which isn’t something they always do.

Speaking of Productivity and Business Processes, this segment includes not only LinkedIn, but also Office Commercial, Office Consumer, and Dynamics. Revenue for this segment for this quarter was up 22% to $7.96 billion, with LinkedIn revenues adding 15% to the result since they’ve not been included before. Operating income though dropped for the same reasons, down 7% to $2.78 billion, almost exclusively due to the operating drag of LinkedIn. But despite that, this was still an important quarter for Microsoft, since Office 365 commercial seats grew another 35% year-over-year, and now has over 100 million monthly active users. Microsoft Teams is now a part of this as well, and Microsoft stated they have over 50,000 customers using Teams already, and since it is included with Office 365, that number will likely grow quickly. Office 365 consumer (Personal and Home versions) now has 26.2 million subscribers, which is up 18% year-over-year. Dynamics also had a strong quarter, with revenue up 10% (11% CC), and Dynamics 365 revenue up 81% (82% CC).

Intelligent Cloud, which includes hosted and cloud server products, as well as enterprise services, had $6.76 billion in revenue, up 11% (12% CC) thanks to growth in server products and cloud services, but there was a decline in revenue from Enterprise Services thanks to a drop in Windows Server 2003 support contracts, as more companies finally move off of that version of Windows Server and no longer need to pay for additional support. Operating income for this segment was flat at $2.18 billion (up 3% CC). Azure continues to be a very strong performer for Microsoft, with Azure revenue up 93% year-over-year (94% CC) and Azure compute usage more than doubled in the last year. Server products and cloud services grew 15%, and Enterprise Mobility had its install base grow by over two times for the twelfth consecutive quarter.

More Personal Computing had a revenue decline of 7% to $8.84 billion, due to lowered revenue in phones (which are now at about zero) and a decline in Surface sales. Operating income grew 20% though, to $2.1 billion, and operating expenses declined 11% for this segment driven by lower phone expenses, and Surface launch marketing a year ago.

Surface, as already stated, was down for the quarter, and it was a substantial drop of 26% (25% CC), and Microsoft is attributing this to end-of-lifecycle dynamics, as well as increased price competition from the competition. To put that in plain speak, Surface hasn’t seen a substantial refresh since Surface Pro 4 and Surface Book were unveiled in October 2015, and although the Surface Studio was announced in October, that is a very niche device and it would be unfair to think it would play a big part in sales. Also, their competitors have brought competing devices to market to directly compete against Microsoft, especially with the successful Surface Pro 4, and we’ve seen quite a few direct competitors launched since the SP4 came out. We would expect to see something from Microsoft soon, but the original goal for Surface was to drive the ecosystem to better products, and clearly they’ve almost succeeded too well.

With phone revenue declining $730 million, the revenue of this entire segment took a big hit, but since Microsoft lost money on every phone sold, they are actually coming out ahead here. Phone revenue was down 99% from a year ago, meaning they should finally be able to stop reporting this result. 

Windows did well, with OEM Pro revenue up 10%, and OEM non-Pro declined 1%, which is well ahead of the PC market as a whole. Search revenue was up 8%, and gaming revenue was up 4%, driven by growth in Xbox Live, which now has 52 million active users.

It was another strong quarter from Microsoft, and although their hopes of being a player in the mobile market have faded, they are still very well positioned for the future in their cloud business, while at the same time their consumer devices and software continue to outperform the declining PC market.

Source: Microsoft

The Windows 10 Creators Update Arrives

Windows 10 launched in July 2015, and on April 11, 2017, Microsoft released the third major update to their latest operating system. First announced in October with the Surface Studio, Microsoft has dubbed the latest update the Creators Update. Offici…

Microsoft Announces Q2 FY 2017 Results

This afternoon, Microsoft had its earnings announcement for the second quarter of their 2017 fiscal year. The results for this quarter are the first to contain results from their acquisition of Linkedin, which Microsoft purchased for $26.2 billion. For this quarter, the Non-GAAP results reflect an exclusion of the LinkedIn results, to better compare the rest of Microsoft’s earnings year-over-year, in addition to another set of Non-GAAP results which do include the LinkedIn results.

But on a GAAP basis, the numbers from LinkedIn are reported. Looking at the GAAP results, Microsoft had revenue for Q2 of $24.1 billion, up 1% from a year ago. Gross margin was 58.9%, up 0.4%, and operating income came in at $6.2 billion, up 3%. Net income for the quarter was $5.2 billion, up 4%, and earnings per share were $0.66, up 6%.

Microsoft typically defers the revenue from Windows 10 licenses over the life of the computing device, to adhere to current revenue recognition accounting guidance. Previously, a sale of Windows would be a sale of Windows, with all of the revenue for that license being accounted for right away. Microsoft is moving its guidance on this to recognize the revenue at the time of billing, rather than over the life of the device, but has not yet adopted this accounting practice, so the Non-GAAP results this, with $2.0 billion in Windows 10 revenue deferrals.

On a Non-GAAP basis, revenue was $26.1 billion, up 2%, or 4% in constant currency (CC – excluding the effect of foreign currency rate fluctuations). Excluding LinkedIn resulted in $25.8 billion, up 1%, or 3% CC. Gross margin for the quarter was 62%, up 0.7%, and excluding LinkedIn, it was 62.1%, up 0.8%. Operating income for the quarter was $8.2 billion, up 5%, and 8% CC, and excluding LinkedIn resulted in $8.4 billion, up 8% and 11% CC. Net income was $6.5 billion, up 6%, and 10% CC, with the exclusion results of $6.6 billion. Earnings per share came in at $0.83, up 9%, and 13% CC, and the results were $0.84, up 11%, and 15% CC, if you exclude LinkedIn.

Luckily, Microsoft is not expecting to break out the LinkedIn results in Non-GAAP results in the future, but for this quarter, there is quite a few extra numbers to evaluate. LinkedIn itself had $228 million in revenue for Q4, with an operating loss of $201 million, with the sale closing on December 8, 2016.

 Microsoft has shuffled their product groups around a bit for reporting, and they now have three groups named Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. For those that are interested, LinkedIn results will be in the first group.

Productivity and Business Processes is a big part of Microsoft, with revenues of $7.38 billion, up 10%, but this is a high margin business, featuring Office commercial and cloud products, Office 365 commercial and consumer, as well as Dynamics and now LinkedIn. This segment had an operating income of $3.26 billion for the quarter, down 1%. Microsoft gained 37% more Office 365 commercial seats this quarter, and 900,000 more Office 365 consumer subscribers. Microsoft doesn’t always give out the total seats for Office 365, but they did announce they were over 70 million seats in May of 2016, and Q2, so expect them to be closing in on 100 million seats. Dynamics is another key to this group, and the Dynamics products had 7% growth year-over-year, with Dynamics 365 growing over 200% year-over-year as people switch to the cloud version of Dynamics.

Intelligent Cloud is Microsoft’s server products, both on premise and cloud products. This segment had revenues of $6.86 billion, up 8% from a year ago. Operating income for this segment was $2.4 billion, down 7% from a year ago. Server products and cloud services saw revenue grow 12% year-over-year, but enterprise services fell 4%.Azure revenue was up 93% compared to the same time last year, and Microsoft has seen over double the use of Azure compute.

More Personal Computing continued to have the highest revenue per segment, at $11.82 billion, but it fell 5% compared to the same time last year. Margins are also not as high in this segment, with an operating income of $2.5 billion for the quarter. Microsoft has seen growth in its key areas though, despite the dip in revenue. Windows OEM Pro revenue was up 6%, and non-Pro was up 5%. Windows commercial products and cloud services had revenue gains of 5%. Surface revenue was down 2%, which is actually quite good considering Microsoft had launched the Surface Pro 4 and Surface Book in Q2 2016, so being almost flat year-over-year, when the product has not been refreshed, is decent. Surface had revenue of $1.3 billion for the quarter. Gaming revenue for the quarter was down 3%, to $3.595 billion. Lower console pricing, and lower console sales, contributed to the decline. Microsoft has found strong growth in their digital ecosystem though, with Xbox software and services growing revenue by 18%, and for the first time, digital transactions reached $1 billion for the quarter. Xbox Live active users grew 15% to 55 million as well, across all of Microsoft’s platforms. Search revenue was also up 10%.

The big hit to More Personal Computing continues to be the loss in revenue from the phone division, which was shuttered. Phone revenue was down 81% as Microsoft phases out of this market.

Overall it was a strong outing by Microsoft. They continue to advance their cloud platforms, and recently announced Microsoft Teams as a Slack competitor which is bundled with Office 365. The competitive pricing is likely going to win them a lot of customers with this new tool, and it will just be part of Office 365. They have continued to add value to this, on both the commercial and consumer lineup, and their work here has paid off well. Their move to the cloud has mostly overshadowed the client computing side, as far as on the financials, but More Personal Computing also had some strong growth, if you exclude the phones.

Source: Microsoft Investor Relations