Microsoft Earnings Out, Revenue $25.7 billion

Chris CrumBusiness

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Microsoft just announced its earnings report for its fiscal year 2016 Q2. The company beat Wall Street expectations for revenue and earnings per share at $25.7 billion and $0.78 respectively.

The company says its results are highlighted by its cloud strength.

CEO Satya Nadella said, "Businesses everywhere are using the Microsoft Cloud as their digital platform to drive their ambitious transformation agendas. Businesses are also piloting Windows 10, which will drive deployments beyond 200 million active devices.”

Here's the release in its entirety:

REDMOND, Wash. — January 28, 2016 — Microsoft Corp. today announced the following results for the quarter ended December 31, 2015:

  • Revenue was $23.8 billion GAAP, and $25.7 billion non-GAAP
  • Operating income was $6.0 billion GAAP, and $7.9 billion non-GAAP
  • Net income was $5.0 billion GAAP, and $6.3 billion non-GAAP
  • Earnings per share was $0.62 GAAP, and $0.78 non-GAAP

During the quarter, Microsoft returned $6.5 billion to shareholders in the form of share repurchases and dividends.

“Businesses everywhere are using the Microsoft Cloud as their digital platform to drive their ambitious transformation agendas,” said Satya Nadella, chief executive officer at Microsoft. “Businesses are also piloting Windows 10, which will drive deployments beyond 200 million active devices.”

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (“GAAP”) to non-GAAP financial results. Microsoft has provided this non-GAAP financial information to aid investors in better understanding the company’s performance. All growth comparisons relate to the corresponding period in the last fiscal year.

  Three Months Ended December 31,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Earnings per Share  
2014 As Reported (GAAP) $26,470 $7,776 $5,863 $0.71  
  Net Impact from Revenue Deferrals (326) (326) (248) (0.03)  
  Integration and Restructuring Charges - 243 175 0.02  
2014 As Adjusted (non-GAAP) $26,144 $7,693 $5,790 $0.70  
2015 As Reported (GAAP) $23,796 $6,026 $4,998 $0.62  
  Net Impact from Revenue Deferrals 1,897 1,897 1,277 0.16  
2015 As Adjusted (non-GAAP) $25,693 $7,923 $6,275 $0.78  
Percentage Change Y/Y (GAAP) (10)% (23)% (15)% (13)%  
Percentage Change Y/Y (non-GAAP) (2)% 3% 8% 11%  
Percentage Change Y/Y (non-GAAP) Constant Currency 3% 13% 20% 23%  
           

“We delivered double-digit operating income growth in non-GAAP constant currency while investing in key strategic areas that position Microsoft for continued long term growth,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

Revenue in Productivity and Business Processes declined 2% (up 5% in constant currency) to $6.7 billion, with the following business highlights:

  • Office commercial products and cloud services revenue grew 5% in constant currency driven by Office 365 revenue growth of nearly 70% in constant currency
  • Office 365 consumer subscribers increased to 20.6 million
  • Dynamics revenue grew 11% in constant currency with Dynamics CRM Online seat adds more than doubling year-over-year for the fifth consecutive quarter

Revenue in Intelligent Cloud grew 5% (up 11% in constant currency) to $6.3 billion, with the following business highlights:

  • Server products and cloud services revenue grew 10% in constant currency
  • Azure revenue grew 140% in constant currency with revenue from Azure premium services growing nearly 3x year-over-year
  • Over one third of the Fortune 500 have chosen our Enterprise Mobility solutions, up nearly 3x year-over-year

Revenue in More Personal Computing declined 5% (down 2% in constant currency) to $12.7 billion, with the following business highlights:

  • Windows OEM revenue declined 5% in constant currency, outperforming the PC market, driven by higher consumer premium and mid-range device mix
  • Surface revenue increased 29% in constant currency driven by the launch of Surface Pro 4 and Surface Book
  • Phone revenue declined 49% in constant currency reflecting our strategy change announced in July 2015
  • Search advertising revenue excluding traffic acquisition costs grew 21% in constant currency with continued benefit from Windows 10 usage
  • Xbox Live monthly active users grew 30% year-over-year to a record 48 million

“It was a strong holiday season for Microsoft highlighted by Surface and Xbox,” said Kevin Turner, chief operating officer at Microsoft. “Our commercial business executed well as our sales teams and partners helped customers realize the value of Microsoft’s cloud technologies across Azure, Office 365 and CRM Online.”

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.

Webcast Details

Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, John Seethoff, deputy general counsel and corporate secretary, and Chris Suh, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed athttp://www.microsoft.com/investor. The webcast will be available for replay through the close of business on January 28, 2017.

Adjusted Financial Results and non-GAAP Measures

During the second quarter of fiscal year 2016, GAAP revenue, operating income, net income, and earnings per share include the net impact from revenue deferrals. For the second quarter of fiscal year 2015, GAAP revenue, operating income, net income, and earnings per share include the recognition of previously deferred net revenue and charges related to integration and restructuring expenses. These items are defined below. In addition to these financial results reported in accordance with GAAP, Microsoft has provided certain non-GAAP financial information to aid investors in better understanding the company’s performance. Presenting these non-GAAP measures gives additional insight into operational performance and helps clarify trends affecting the company’s business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Non-GAAP Definitions

Revenue Deferrals. Microsoft recorded a net $1.9 billion revenue deferral during the three months ended December 31, 2015, primarily related to Windows 10 and Halo 5.

Microsoft recognized a net $326 million of previously deferred revenue during the three months ended December 31, 2014, primarily related to sales of bundled products and services.

Integration and Restructuring Charges. Integration and restructuring expenses were $243 million during the three months ended December 31, 2014. Integration and restructuring expenses include employee severance expenses and costs associated with the consolidation of facilities and manufacturing operations related to restructuring activities, and systems consolidation and other business integration expenses associated with the acquisition of Nokia’s Devices and Services business.

Constant Currency

Microsoft presents constant currency information to provide a non-GAAP framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period non-GAAP results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods.  The non-GAAP financial measures presented below should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. All growth comparisons relate to the corresponding period in the last fiscal year.

Financial Performance Constant Currency Reconciliation

  Three Months Ended December 31,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Earnings per Share  
2014 As Reported (GAAP) $26,470 $7,776 $5,863 $0.71  
2014 As Adjusted (non-GAAP) $26,144 $7,693 $5,790 $0.70  
2015 As Reported (GAAP) $23,796 $6,026 $4,998 $0.62  
2015 As Reported (non-GAAP) $25,693 $7,923 $6,275 $0.78  
Percentage Change Y/Y (GAAP) (10)% (23)% (15)% (13)%  
Percentage Change Y/Y (non-GAAP) (2)% 3% 8% 11%  
Constant Currency Impact $(1,212) $(766) $(676) $(0.08)  
Percentage Change Y/Y (non-GAAP) Constant Currency 3% 13% 20% 23%  

Segment Revenue Constant Currency Reconciliation

  Three Months Ended December 31,
 ($ in millions) Productivity and Business Processes Intelligent Cloud More Personal Computing  
2014 As Reported (GAAP) $6,822 $6,041 $13,282  
2015 As Reported (GAAP) $6,690 $6,343 $12,660  
Percentage Change Y/Y (GAAP) (2)% 5% (5)%  
Constant Currency Impact $(439) $(369) $(404)  
Percentage Change Y/Y (GAAP) Constant Currency 5% 11% (2)%  

 

About Microsoft

Microsoft (Nasdaq “MSFT” @microsoft) is the leading platform and productivity company for the mobile-first, cloud-first world and its mission is to empower every person and every organization on the planet to achieve more.

Forward-Looking Statements

Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as:

  • intense competition in all of Microsoft’s markets;
  • increasing focus on services presents execution and competitive risks;
  • significant investments in new products and services that may not be profitable;
  • acquisitions, joint ventures, and strategic alliances may have an adverse effect on our business;
  • impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;
  • Microsoft’s continued ability to protect and earn revenues from its intellectual property rights;
  • claims that Microsoft has infringed the intellectual property rights of others;
  • the possibility of unauthorized disclosure of significant portions of Microsoft’s source code;
  • cyber-attacks and security vulnerabilities in Microsoft products and services that could reduce revenue or lead to liability;
  • disclosure of personal data that could cause liability and harm to Microsoft’s reputation;
  • outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;
  • government litigation and regulation that may limit how Microsoft designs and markets its products;
  • potential liability under trade protection and anti-corruption laws resulting from our international operations;
  • laws and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims or fines against us;
  • Microsoft’s ability to attract and retain talented employees;
  • adverse results in legal disputes;
  • unanticipated tax liabilities;
  • Microsoft’s hardware and software products may experience quality or supply problems;
  • exposure to increased economic and operational uncertainties from operating a global business;
  • catastrophic events or geo-political conditions may disrupt our business; and
  • adverse economic or market conditions may harm our business.

For more information about risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft’s Investor Relations department at (800) 285-7772 or at Microsoft’s Investor Relations website athttp://www.microsoft.com/investor.

All information in this release is as of January 28, 2016. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.

For more information, press only:

Rapid Response Team, Waggener Edstrom Worldwide, (503) 443-7070,rrt@waggeneredstrom.com

For more information, financial analysts and investors only:

Chris Suh, general manager, Investor Relations, (425) 706-4400

Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news/. Web links, telephone numbers, and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today’s 2:30 p.m. Pacific time conference call with investors and analysts, is available athttp://www.microsoft.com/investor.

MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except per share amounts)(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
  2015   2014   2015   2014
Revenue  $   23,796  $26,470  $    44,175  $49,671
Cost of revenue 9,872 10,136 17,079 18,409
   Gross margin 13,924 16,334 27,096 31,262
Research and development 2,900 2,903 5,862 5,968
Sales and marketing 3,960 4,315 7,293 8,043
General and administrative 1,038 1,097 2,122 2,248
Impairment, integration, and
restructuring
0 243 0 1,383
Operating income 6,026 7,776 11,819 13,620
Other income (expense), net (171) 74 (451) 126
Income before income taxes 5,855 7,850 11,368 13,746
Provision for income taxes 857 1,987 1,750 3,343
Net income  $     4,998  $  5,863  $      9,618  $10,403
Earnings per share:
   Basic  $      0.63  $    0.71  $        1.21  $    1.26
   Diluted  $      0.62  $    0.71  $        1.20  $    1.25
Weighted average shares outstanding:
   Basic 7,964 8,228 7,980 8,238
   Diluted 8,028 8,297 8,047 8,321
Cash dividends declared per
common share
 $      0.36    $    0.31    $        0.72    $    0.62

 

MICROSOFT CORPORATION
COMPREHENSIVE INCOME STATEMENTS
(In millions)(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
  2015   2014   2015   2014
Net income  $     4,998  $  5,863  $      9,618  $10,403
Other comprehensive income (loss):
   Net unrealized gains (losses) on
derivatives (net of tax effects
of $5, $6, $28, and $10)
(49) 247 8 566
   Net unrealized gains (losses) on
investments (net of tax effects
of $86, $(124), $(222), and
$(226))
160 (231) (411) (420)
   Translation adjustments and
other (net of tax effects of
$(9), $(211), $(21), and $(258))
(76) (390) (346) (471)
      Other comprehensive income
(loss)
35 (374) (749) (325)
Comprehensive income  $     5,033  $  5,489  $      8,869  $10,078

 

MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)(Unaudited)
  December 31,
2015
  June 30, 2015
Assets
Current assets:
  Cash and cash equivalents  $           7,185  $      5,595
  Short-term investments (including securities
loaned of $360 and $75)
95,455 90,931
    Total cash, cash equivalents, and short-term
investments
102,640 96,526
  Accounts receivable, net of allowance for doubtful
accounts of $384 and $335
14,507 17,908
  Inventories 2,702 2,902
  Deferred income taxes 1,618 1,915
  Other 6,345 5,461
    Total current assets 127,812 124,712
Property and equipment, net of accumulated
depreciation of $18,008 and $17,606
15,789 14,731
Equity and other investments 11,514 12,053
Goodwill 17,436 16,939
Intangible assets, net 4,619 4,835
Other long-term assets 2,928 2,953
           Total assets  $       180,098  $  176,223
Liabilities and stockholders' equity
Current liabilities:
  Accounts payable  $           6,936  $      6,591
  Short-term debt 3,000 4,985
  Current portion of long-term debt 750 2,499
  Accrued compensation 3,649 5,096
  Income taxes 493 606
  Short-term unearned revenue 20,929 23,223
  Securities lending payable 439 92
  Other 6,447 6,766
    Total current liabilities 42,643 49,858
Long-term debt 40,679 27,808
Long-term unearned revenue 4,102 2,095
Deferred income taxes 2,194 2,835
Other long-term liabilities 13,700 13,544
    Total liabilities 103,318 96,140
Commitments and contingencies
Stockholders' equity:
  Common stock and paid-in capital - shares
authorized 24,000; outstanding 7,925 and 8,027
68,279 68,465
  Retained earnings 6,728 9,096
  Accumulated other comprehensive income 1,773 2,522
    Total stockholders' equity 76,780 80,083
           Total liabilities and stockholders' equity  $       180,098  $  176,223

 

MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
  2015   2014   2015   2014
Operations
Net income  $     4,998  $  5,863  $      9,618  $10,403
Adjustments to reconcile net
income to net cash from
operations:
   Depreciation, amortization, and
other
1,544 1,521 3,005 2,949
   Stock-based compensation
expense
658 633 1,332 1,279
   Net recognized losses (gains)
on investments and derivatives
50 (179) 151 (124)
   Excess tax benefits from
stock-based compensation
(20) (22) (302) (524)
   Deferred income taxes (247) 314 (174) 615
   Deferral of unearned revenue 12,570 10,200 22,993 18,222
   Recognition of unearned revenue (11,929) (11,495) (23,284) (22,138)
   Changes in operating assets
and liabilities:
      Accounts receivable (3,118) (3,378) 3,258 3,249
      Inventories 1,104 1,070 167 587
      Other current assets (912) (159) (1,192) (439)
      Other long-term assets 56 170 51 449
      Accounts payable 369 137 234 (522)
      Other current liabilities 105 (986) (1,919) (2,152)
      Other long-term liabilities 370 651 254 840
         Net cash from operations 5,598 4,340 14,192 12,694
Financing
Proceeds from issuance
(repayments) of short-term debt,
maturities of 90 days or less, net
(7,031) 4,798 (2,141) 7,797
Proceeds from issuance of debt 13,128 0 13,249 0
Repayments of debt (121) 0 (1,871) (1,500)
Common stock issued 117 121 336 337
Common stock repurchased (3,678) (2,145) (8,435) (5,033)
Common stock cash dividends paid (2,868) (2,547) (5,343) (4,854)
Excess tax benefits from
stock-based compensation
20 22 302 524
Other (65) 285 (243) 285
         Net cash from (used in)
financing
(498) 534 (4,146) (2,444)
Investing
Additions to property and
equipment
(2,024) (1,490) (3,380) (2,772)
Acquisition of companies, net of
cash acquired, and purchases of
intangible and other assets
(381) (2,794) (771) (2,935)
Purchases of investments (34,750) (19,167) (72,320) (43,252)
Maturities of investments 5,351 2,389 11,037 4,082
Sales of investments 28,191 16,108 56,693 32,553
Securities lending payable 285 238 347 (129)
         Net cash used in investing (3,328) (4,716) (8,394) (12,453)
Effect of exchange rates on cash
and cash equivalents
(18) (34) (62) (40)
Net change in cash and cash
equivalents
1,754 124 1,590 (2,243)
Cash and cash equivalents,
beginning of period
5,431 6,302 5,595 8,669
Cash and cash equivalents, end of
period
 $     7,185  $  6,426  $      7,185  $  6,426

 

 

MICROSOFT CORPORATION              
               
SEGMENT REVENUE AND OPERATING INCOME
(In millions)(Unaudited)
               
  Three Months Ended December 31,   Six Months Ended December 31,
   
  2015   2014   2015   2014
Revenue              
Productivity and Business Processes  $     6,690    $  6,822    $   12,990    $13,312
Intelligent Cloud 6,343   6,041   12,232   11,516
More Personal Computing 12,660   13,282   22,114   24,548
Corporate and Other (1,897)   325   (3,161)   295
  Total revenue  $   23,796    $26,470    $   44,175    $49,671
               
Operating Income (Loss)              
Productivity and Business Processes  $     3,305    $  3,587    $     6,460    $  6,988
Intelligent Cloud 2,580   2,600   4,977   4,705
More Personal Computing 2,038   1,506   3,542   3,014
Corporate and Other (1,897)   83   (3,160)   (1,087)
  Total operating income  $     6,026    $  7,776    $   11,819    $13,620


 
Image via Microsoft

Chris Crum
Chris Crum has been a part of the WebProNews team and the iEntry Network of B2B Publications since 2003. Follow Chris on Twitter, on StumbleUpon, on Pinterest and/or on Google: +Chris Crum.