Microsoft reported quarterly earnings Wednesday exceeding Wall Street’s expectations. However, the company’s stock fell by nearly 3% in after-hours trading.
Although the company’s results were largely positive, Microsoft said its transactional license purchasing continued to slow and that subsidiary LinkedIn was negatively impacted by the weak job market.
Earnings were $1.46 per share, adjusted, vs. $1.34 per share as expected by analysts, while Revenue was $38.03 billion, vs. $36.50 billion as expected by analysts.
Microsoft’s overall revenue grew 13% on an annualised basis in the quarter, which ended June 30. Revenue went up 15% in the prior quarter, which saw less impact from the coronavirus pandemic.
Microsoft’s intelligent cloud business segment, which includes the Azure public cloud, Windows Server, SQL Server, GitHub and enterprise services, posted $13.37 billion in revenue, up 17% year over year and above the $13.11 billion consensus among analysts polled by FactSet.
Azure revenue growth slowed to 47% from 59% in the previous quarter. Microsoft does not disclose Azure revenue in dollars, but did say its commercial cloud business surpassed $50 billion in revenue for the fiscal year.
Capital expenditures came to $5.8 billion, almost double what it was three years ago as the company looks to expand the infrastructure to deliver Azure and its own online services.
The Productivity and Business Processes unit, which contains Office, Dynamics and LinkedIn, contributed $11.75 billion in revenue. That’s up 6% and less than the FactSet consensus of $11.91 billion. LinkedIn’s revenue grew 10%, the slowest growth since 2016 as Microsoft closed the $27 billion acquisition, given the weaker job market and less spending on advertising.
The operating margin for that part of the company, at 33.8%, was the lowest since 2017. Marketing of the Teams communications app partly caused an increase in the unit’s operating expenses.
The company’s More Personal Computing unit, including Windows, search, Surface and Xbox, had $12.91billion in quarterly revenue, which is 14% and higher than the $11.48 billion FactSet consensus. Xbox content and services revenue was up 65% with record engagement as people stayed from home and played games.
The performance, which included benefit from the company’s Minecraft video game, was better than the company had expected, Amy Hood, Microsoft’s chief financial officer, said on a conference call with analysts on Wednesday.
Sales of licenses for commercial Windows devices shrank 4%, the slowest growth since 2016, while licenses for consumer devices accelerated to 34% after falling 10% one quarter earlier. Search ad revenue, excluding traffic acquisition costs, declined 18%, with customers reducing how much they spend.
The company’s earnings were pulled down slightly by a shift in Microsoft’s retail strategy. On June 26 Microsoft said it would close its physical stores, resulting in a one-time charge of $450 million, or 5 cents per share, before taxes.
Also in the quarter Microsoft disclosed a plan to shut down its Mixer video game streaming service, and announced the acquisitions of CyberX, Metaswitch and Softomotive.
Microsoft called for $35.61 billion in revenue for the fiscal first quarter, implying 8% revenue growth The forecast was lower than the $35.91 billion that analysts polled by Refinitiv had been looking for.
The company is changing its accounting to better reflect the useful life of server equipment, raising it to four years, and that adjustment will benefit operating income for the full 2021 fiscal year by $2.7 billion, Hood said.
Excluding the after-hours move, Microsoft shares are up about 34% since the beginning of the year.
Microsoft Earnings Release FY20 Q4
Satya Nadella, chief executive officer of Microsoft said,
“The last five months have made it clear that tech intensity is the key to business resilience. Organisations that build their own digital capability will recover faster and emerge from this crisis stronger,”
“We are the only company with an integrated, modern technology stack – powered by cloud and AI and underpinned by security and compliance – to help every organisation transform and re-imagine how they meet customer needs.”
Amy Hood, executive vice president and chief financial officer of Microsoft added:
“Our commercial cloud surpassed $50 billion in annual revenue for the first time this year. And this quarter our Commercial bookings were better than expected, growing 12% year-over-year,”
“As we drive growth across the company, we remain committed to investing in long-term strategic opportunities.”
The following table reconciles financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.
| Three Months Ended June 30, | |||||
|---|---|---|---|---|---|
| ($ in millions, except per share amounts) | Revenue | Operating Income | Net Income | Diluted Earnings per Share | |
| 2019 As Reported (GAAP) | $33,717 | $12,405 | $13,187_ | $1.71_ | |
| Net Tax Impact of Transfer of Intangible Properties | – | – | (2,567) | (0.34) | |
| 2019 As Adjusted (non-GAAP) | $33,717 | $12,405 | $10,620_ | $1.37_ | |
| 2020 As Reported (GAAP) | $38,033 | $13,407 | $11,202_ | $1.46_ | |
| Percentage Change Y/Y (GAAP) | 13% | 8% | (15%) | (15%) | |
| Percentage Change Y/Y (non-GAAP) | 13% | 8% | 5%_ | 7%_ | |
| Percentage Change Y/Y (non-GAAP) Constant Currency | 15% | 12% | 8%_ | 9%_ | |
GAAP results include a $450 million charge for the closure of the Microsoft Store physical locations in the fourth quarter of fiscal year 2020. GAAP results also include a net income tax benefit of $2.6 billion for the fourth quarter of fiscal year 2019, which is excluded from our non-GAAP results and explained in the non-GAAP definition section below.
COVID-19 Impact
In the fourth quarter of fiscal year 2020, similar business trends to the previous quarter continued.
In the Productivity and Business Processes and Intelligent Cloud segments, cloud usage and demand increased as customers continued to work and learn from home. Transactional license purchasing continued to slow, particularly in small and medium businesses, and LinkedIn was negatively impacted by the weak job market and reductions in advertising spend.
In the More Personal Computing segment, Windows OEM, Surface, and Gaming benefited from increased demand to support work-, play-, and learn-from-home scenarios, while Search was negatively impacted by reductions in advertising spend.
Business Highlights
Revenue in Productivity and Business Processes was $11.8 billion and increased 6% (up 8% in constant currency), with the following business highlights:
- Office Commercial products and cloud services revenue increased 5% (up 7% in constant currency) driven by Office 365 Commercial revenue growth of 19% (up 22% in constant currency)
- Office Consumer products and cloud services revenue increased 6% (up 7% in constant currency) and Office 365 Consumer subscribers increased to 42.7 million
- LinkedIn revenue increased 10% (up 11% in constant currency)
- Dynamics products and cloud services revenue increased 13% (up 15% in constant currency) driven by Dynamics 365 revenue growth of 38% (up 40% in constant currency)
Revenue in Intelligent Cloud was $13.4 billion and increased 17% (up 19% in constant currency), with the following business highlights:
- Server products and cloud services revenue increased 19% (up 21% in constant currency) driven by Azure revenue growth of 47% (up 50% in constant currency)
- Enterprise Services revenue was relatively unchanged (up 2% in constant currency)
Revenue in More Personal Computing was $12.9 billion and increased 14% (up 16% in constant currency), with the following business highlights:
- Windows OEM revenue increased 7%
- Windows Commercial products and cloud services revenue increased 9% (up 11% in constant currency)
- Xbox content and services revenue increased 65% (up 68% in constant currency)
- Surface revenue increased 28% (up 30%in constant currency)
- Search advertising revenue excluding traffic acquisition costs decreased 18% (down 17% in constant currency)
Operating expenses were $12.3 billion and increased 13%, including the $450 million charge for the closure of the Microsoft Store physical locations.
Microsoft returned $8.9 billion to shareholders in the form of share repurchases and dividends in the fourth quarter of fiscal year 2020, an increase of 16% compared to the fourth quarter of fiscal year 2019.
Fiscal Year 2020 Results
GAAP results include a net income tax benefit of $2.6 billion and a net income tax charge of $157 million for the twelve months ended June 30, 2019. These net tax impacts are excluded from our non-GAAP results and explained in the Non-GAAP Definition section below.
Business Outlook
Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.
Quarterly Highlights, Product Releases, and Enhancements
Here are the major product releases and other highlights for the quarter, organized by product categories, to help illustrate how we are accelerating innovation across our businesses while expanding our market opportunities.
Webcast Details
Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, Keith Dolliver, deputy general counsel, and Michael Spencer, 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 here. The webcast will be available for replay through the close of business on July 22, 2021.
Non-GAAP Definition
Transfer of Intangible Properties. In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, Microsoft transferred certain intangible properties held by its foreign subsidiaries to the United States and Ireland. The transfers of intangible properties resulted in a net $2.6 billion tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and United States Global Intangible Low-Taxed Income (GILTI) tax.
The TCJA Impact. Microsoft recorded a net charge of $157 million during the twelve months ended June 30, 2019 related to the TCJA.
Microsoft has provided non-GAAP financial measures related to the transfer of intangible properties and the TCJA to aid investors in better understanding our performance. Microsoft believes these non-GAAP measures assist investors by providing additional insight into its operational performance and help clarify trends affecting its business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
Constant Currency
Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-GAAP financial information to aid investors in better understanding our performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
Financial Performance Constant Currency Reconciliation
| Three Months Ended June 30, | ||||
|---|---|---|---|---|
| ($ in millions, except per share amounts) | Revenue | Operating Income | Net Income | Diluted Earnings per Share |
| 2019 As Reported | $33,717_ | $12,405_ | $13,187_ | $1.71_ |
| 2019 As Adjusted (non-GAAP) | $33,717_ | $12,405_ | $10,620_ | $1.37_ |
| 2020 As Reported | $38,033_ | $13,407_ | $11,202_ | $1.46_ |
| Percentage Change Y/Y (GAAP) | 13% | 8%_ | (15%) | (15%) |
| Percentage Change Y/Y (non-GAAP) | 13% | 8%_ | 5%_ | 7%_ |
| Constant Currency Impact | $(598) | $(454) | $(314) | $(0.04) |
| Percentage Change Y/Y (non-GAAP) Constant Currency | 15% | 12% | 8%_ | 9%_ |
| Twelve Months Ended June 30, | ||||
| ($ in millions, except per share amounts) | Revenue | Operating Income | Net Income | Diluted Earnings per Share |
| 2019 As Reported | $125,843_ | $42,959_ | $39,240_ | $5.06_ |
| 2019 As Adjusted (non-GAAP) | $125,843_ | $42,959_ | $36,830_ | $4.75_ |
| 2020 As Reported | $143,015_ | $52,959_ | $44,281_ | $5.76_ |
| Percentage Change Y/Y (GAAP) | 14%_ | 23%_ | 13%_ | 14%_ |
| Percentage Change Y/Y (non-GAAP) | 14%_ | 23%_ | 20%_ | 21%_ |
| Constant Currency Impact | $(1,974) | $(1,567) | $(1,348) | $(0.18) |
| Percentage Change Y/Y (non-GAAP) Constant Currency | 15%_ | 27%_ | 24%_ | 25%_ |
Segment Revenue Constant Currency Reconciliation
| Three Months Ended June 30, | |||
|---|---|---|---|
| ($ in millions) | Productivity and Business Processes | Intelligent Cloud | More Personal Computing |
| 2019 As Reported | $11,047_ | $11,391_ | $11,279_ |
| 2020 As Reported | $11,752_ | $13,371_ | $12,910_ |
| Percentage Change Y/Y | 6%_ | 17%_ | 14%_ |
| Constant Currency Impact | $(209) | $(238) | $(151) |
| Percentage Change Y/Y Constant Currency | 8%_ | 19%_ | 16%_ |
Selected Product and Service Revenue Constant Currency Reconciliation
| Three Months Ended June 30, 2020 | |||
|---|---|---|---|
| Percentage Change Y/Y (GAAP) | Constant Currency Impact | Percentage Change Y/Y Constant Currency | |
| Office Commercial products and cloud services | 5% | 2% | 7% |
| Office 365 Commercial | 19% | 3% | 22% |
| Office Consumer products and cloud services | 6% | 1% | 7% |
| 10% | 1% | 11% | |
| Dynamics products and cloud services | 13% | 2% | 15% |
| Dynamics 365 | 38% | 2% | 40% |
| Server products and cloud services | 19% | 2% | 21% |
| Azure | 47% | 3% | 50% |
| Enterprise Services | 0% | 2% | 2% |
| Windows OEM | 7% | 0% | 7% |
| Windows Commercial products and cloud services | 9% | 2% | 11% |
| Xbox content and services | 65% | 3% | 68% |
| Surface | 28% | 2% | 30% |
| Search advertising excluding traffic acquisition costs | (18)% | 1% | (17)% |
