FY19 Q2 - Press Releases - Investor Relations - Microsoft


Microsoft Cloud Strength Fuels Second Quarter Results

REDMOND, Wash. — January 30, 2019 — Microsoft Corp. today announced the following results for the quarter ended December 31, 2018, as compared to the corresponding period of last fiscal year:

·        Revenue was $32.5 billion and increased 12%

·        Operating income was $10.3 billion and increased 18%

·        Net income was $8.4 billion GAAP and $8.6 billion non-GAAP

Diluted earnings per share was $1.08 GAAP and $1.10 non-GAAP

“Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare,” said Satya Nadella, CEO of Microsoft. "We are delivering differentiated value across the cloud and edge as we work to earn customer trust every day.”

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. 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 (Loss)

Diluted Earnings (Loss) per Share

2017 As Reported (GAAP)

$28,918

$8,679

     $(6,302)

$(0.82)

  Net TCJA Impact

-

-

13,800_

1.78_

2017 As Adjusted for TCJA (non-GAAP)

$28,918

$8,679

$7,498_

$0.96_

2018 As Reported (GAAP)

$32,471

$10,258

$8,420_

$1.08_

  Net TCJA Impact

-

-

157_

0.02_

2018 As Adjusted for TCJA (non-GAAP)

$32,471

$10,258

$8,577_

$1.10_

Percentage Change Y/Y (GAAP)

12%

18%

*__

*__

Percentage Change Y/Y (non-GAAP)

12%

18%

14%

15%

Percentage Change Y/Y (non-GAAP) Constant Currency

13%

18%

13%

14%

* Not meaningful

GAAP results include net charges related to the Tax Cuts and Jobs Act (TCJA) of $157 million for the second quarter of fiscal year 2019 and $13.8 billion for the second quarter of fiscal year 2018. These net charges are excluded from our non-GAAP results.

Microsoft returned $9.6 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2019.

"Our solid execution delivered another strong quarter, with commercial cloud revenue growing 48% year-over-year to $9.0 billion,” said Amy Hood, executive vice president and chief financial officer of Microsoft. “We continue to make strategic investments to capture expanding market opportunities to drive growth across our businesses.”

Revenue in Productivity and Business Processes was $10.1 billion and increased 13% (up 13% in constant currency), with the following business highlights:

·        Office Commercial products and cloud services revenue increased 11% (up 11% in constant currency) driven by Office 365 Commercial revenue growth of 34% (up 33% in constant currency)

·        Office Consumer products and cloud services revenue increased 1% (up 2% in constant currency) with growth in Office 365 Consumer subscribers to 33.3 million

·        LinkedIn revenue increased 29% (up 30% in constant currency) with record levels of engagement highlighted by LinkedIn sessions growth of 30%

·        Dynamics products and cloud services revenue increased 17% (up 17% in constant currency) driven by Dynamics 365 revenue growth of 51% (up 50% in constant currency)

Revenue in Intelligent Cloud was $9.4 billion and increased 20% (up 21% in constant currency), with the following business highlights:

·        Server products and cloud services revenue increased 24% (up 24% in constant currency) driven by Azure revenue growth of 76% (up 76% in constant currency)

·        Enterprise Services revenue increased 6% (up 7% in constant currency)

Revenue in More Personal Computing was $13.0 billion and increased 7% (up 7% in constant currency), with the following business highlights:

·        Windows OEM revenue declined 5% (down 5% in constant currency)

·        Windows Commercial products and cloud services revenue increased 13% (up 14% in constant currency)

·        Surface revenue increased 39% (up 41% in constant currency)

·        Gaming revenue increased 8% (up 9% in constant currency) with Xbox software and services revenue growth of 31% (up 32% in constant currency)

·        Search advertising revenue excluding traffic acquisition costs increased 14% (up 14% in constant currency)

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 

Every quarter Microsoft delivers hundreds of products, either as new releases, services, or enhancements to current products and services. These releases are a result of significant research and development investments, made over multiple years, designed to help customers be more productive and secure and to deliver differentiated value across the cloud and the edge.

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, Carolyn Frantz, deputy general counsel and corporate secretary, 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 at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on January 30, 2020.

Non-GAAP Definition

TCJA Impact. We recorded a net charge of $157 million during the three months ended December 31, 2018 and a net charge of $13.8 billion during the three months ended December 31, 2017 related to TCJA. As of December 31, 2018, the U.S. Treasury Department and the Internal Revenue Service (IRS) are still in the process of issuing various TCJA regulations. Accordingly, future adjustments to the financial statements may be necessary as regulations are issued and when we file our fiscal year 2018 tax returns with the IRS and foreign tax authorities in the current fiscal year.  

We have provided non-GAAP financial measures related to TCJA to aid investors in better understanding our performance. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our 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 December 31,

 ($ in millions, except per share amounts)

Revenue

Operating Income

Net Income (Loss)

Diluted Earnings (Loss) per Share

2017 As Reported (GAAP)

$28,918

$8,679

$(6,302)

$(0.82)

2017 As Adjusted (non-GAAP)

$28,918

$8,679

$7,498_

$0.96_

2018 As Reported

$32,471

$10,258

$8,420_

$1.08_

2018 As Adjusted (non-GAAP)

$32,471

$10,258

$8,577_

$1.10_

Percentage Change Y/Y (GAAP)

12%

18%

            *__

              *__

Percentage Change Y/Y (non-GAAP)

12%

18%

14%

15%_

Constant Currency Impact

$(83)

$43

$71

$0.01_

Percentage Change Y/Y (non-GAAP) Constant Currency

13%

18%

13%

14%_

* Not meaningful

Segment Revenue Constant Currency Reconciliation

Three Months Ended December 31,

 ($ in millions)

Productivity and Business Processes

Intelligent Cloud

More Personal Computing

2017 As Reported

$8,953

$7,795

$12,170

2018 As Reported

$10,100

$9,378

$12,993

Percentage Change Y/Y

13%

20%

7%

Constant Currency Impact

$ -

$(20)

$(63)

Percentage Change Y/Y Constant Currency

13%

21%

7%

Selected Product and Service Revenue Constant Currency Reconciliation           

Three Months Ended December 31, 2018

Percentage Change Y/Y (GAAP)

Constant Currency Impact

Percentage Change Y/Y Constant Currency

Office Commercial products and cloud services

11%

0%

11%

Office 365 Commercial

34%

(1)%

33%

Office Consumer products and cloud services

1%

1%

2%

LinkedIn

29%

1%

30%

Dynamics products and cloud services

17%

0%

17%

Dynamics 365

51%

(1)%

50%

Server products and cloud services

24%

0%

24%

Azure

76%

0%

76%

Enterprise Services

6%

1%

7%

Windows OEM

(5)%

0%

(5)%

Windows Commercial products and cloud services

13%

1%

14%

Search advertising excluding traffic acquisition costs

14%

0%

14%

Surface

39%

2%

41%

Gaming

8%

1%

9%

Xbox software and services

31%

1%

32%

About Microsoft

Microsoft (Nasdaq “MSFT” @microsoft) enables digital transformation for the era of an intelligent cloud and an intelligent edge. 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 our markets that may lead to lower revenue or operating margins;

·        increasing focus on cloud-based services presenting execution and competitive risks;

·        significant investments in new products and services that may not achieve expected returns;

·        acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business;

·        impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;

·        legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property;

·        claims that Microsoft has infringed the intellectual property rights of others;

·        the possibility that we may fail to protect our source code;

·        cyberattacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;

·        disclosure and misuse of personal data that could cause liability and harm to our reputation;

·        the possibility that we may not be able to protect information stored in our products and services from use by others;

·        abuse of our advertising or social platforms that may harm our reputation or user engagement;

·        excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;

·        government litigation and regulatory activity relating to competition rules that may limit how we design and market our products;

·        potential liability under trade protection, anti-corruption, and other laws resulting from our global operations;

·        laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, fines, or reputational damage;

·        the dependence of our business on our ability to attract and retain talented employees;

·        claims against us that may result in adverse outcomes in legal disputes;

·        additional tax liabilities;

·        quality or supply problems;

·        exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange;

·        catastrophic events or geo-political conditions that may disrupt our business;

·        adverse economic or market conditions that may harm our business;

·        changes in our sales organization that may impact revenues;

·        the development of the internet of things presenting security, privacy, and execution risks;

·        issues about the use of artificial intelligence in our offerings that may result in competitive harm, legal liability, or reputational harm; and

·        damage to our reputation or our brands that may harm our business and operating results.

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 at http://www.microsoft.com/en-us/investor.

All information in this release is as of December 31, 2018. 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:

Microsoft Media Relations, WE Communications for Microsoft, (425) 638-7777,rrt@we-worldwide.com

For more information, financial analysts and investors only:

Michael Spencer, 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 at http://www.microsoft.com/en-us/investor.


MICROSOFT CORPORATION


INCOME STATEMENTS

(In millions, except per share amounts)(Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

2018

2017

2018

2017

Revenue:

   Product

 $16,219

 $17,926

 $33,518

 $32,224

   Service and other

16,252

10,992

28,037

21,232

      Total revenue

32,471

28,918

61,555

53,456

Cost of revenue:

   Product

5,885

5,498

9,534

8,478

   Service and other

6,538

5,566

12,794

10,864

      Total cost of revenue

12,423

11,064

22,328

19,342

      Gross margin

20,048

17,854

39,227

34,114

Research and development

4,070

3,504

8,047

7,078

Sales and marketing

4,588

4,562

8,686

8,374

General and administrative

1,132

1,109

2,281

2,275

Operating income

10,258

8,679

20,213

16,387

Other income, net

127

490

393

766

Income before income taxes

10,385

9,169

20,606

17,153

Provision for income taxes

1,965

15,471

3,362

16,879

Net income (loss)

 $8,420

 $(6,302)

 $17,244

 $274

Earnings (loss) per share:

   Basic

 $1.09

 $(0.82)

 $2.24

 $0.04

   Diluted

 $1.08

 $(0.82)

 $2.22

 $0.04

Weighted average shares outstanding:

   Basic

7,692

7,710

7,683

7,709

   Diluted

7,768

7,710

7,767

7,799


COMPREHENSIVE INCOME STATEMENTS

(In millions)(Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

2018

2017

2018

2017

Net income (loss)

 $8,420

 $(6,302)

 $17,244

 $274

Other comprehensive income (loss), net of tax:

  Net change related to derivatives

(15)

(7)

(60)

(113)

  Net change related to investments

881

(878)

620

(1,166)

  Translation adjustments and other

(264)

(40)

(319)

253

   Other comprehensive income (loss)

602

(925)

241

(1,026)

Comprehensive income (loss)

 $9,022

 $(7,227)

 $17,485

 $(752)


BALANCE SHEETS

(In millions)(Unaudited)


December 31,

2018

June 30,

2018

Assets

Current assets:

   Cash and cash equivalents

 $6,638

 $11,946

   Short-term investments

121,024

121,822

      Total cash, cash equivalents, and short-term investments

127,662

133,768

   Accounts receivable, net of allowance for doubtful
      accounts of $354 and $377

19,680

26,481

   Inventories

1,961

2,662

   Other

7,571

6,751

      Total current assets

156,874

169,662

Property and equipment, net of accumulated
   depreciation of $33,082 and $29,223

32,717

29,460

Operating lease right-of-use assets

6,806

6,686

Equity investments

2,274

1,862

Goodwill

41,577

35,683

Intangible assets, net

8,482

8,053

Other long-term assets

10,129

7,442

            Total assets

 $258,859

 $258,848

Liabilities and stockholders' equity

Current liabilities:

   Accounts payable

 $7,563

 $8,617

   Current portion of long-term debt

3,516

3,998

   Accrued compensation

4,624

6,103

   Short-term income taxes

2,033

2,121

   Short-term unearned revenue

24,285

28,905

   Other

8,297

8,744

      Total current liabilities

50,318

58,488

Long-term debt

69,653

72,242

Long-term income taxes

29,161

30,265

Long-term unearned revenue

3,799

3,815

Deferred income taxes

2,062

541

Operating lease liabilities

5,683

5,568

Other long-term liabilities

6,055

5,211

         Total liabilities

166,731

176,130

Commitments and contingencies

Stockholders' equity:

   Common stock and paid-in capital - shares
      authorized 24,000; outstanding 7,683 and 7,677

77,556

71,223

   Retained earnings

16,585

13,682

   Accumulated other comprehensive loss

(2,013)

(2,187)

         Total stockholders' equity

92,128

82,718

            Total liabilities and stockholders' equity

 $258,859

 $258,848


CASH FLOWS STATEMENTS

(In millions)(Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

2018

2017

2018

2017

Operations

Net income (loss)

 $8,420

 $(6,302)

 $17,244

 $274

Adjustments to reconcile net income
   (loss) to net cash from operations:

   Depreciation, amortization, and other

2,995

2,536

5,832

5,035

   Stock-based compensation expense

1,183

986

2,290

1,959

   Net recognized gains on
      investments and derivatives

(135)

(684)

(375)

(1,207)

   Deferred income taxes

(173)

(2,305)

(420)

(2,358)

   Changes in operating assets and
      liabilities:

      Accounts receivable

(2,396)

(3,908)

6,798

4,041

      Inventories

1,654

1,205

698

182

      Other current assets

(173)

354

(850)

36

      Other long-term assets

(473)

(344)

(452)

(622)

      Accounts payable

(440)

938

(835)

531

      Unearned revenue

(2,122)

(1,065)

(4,563)

(2,871)

      Income taxes

(64)

15,974

(1,155)

16,635

      Other current liabilities

656

643

(1,666)

(1,521)

      Other long-term liabilities

(32)

(153)

11

201

         Net cash from operations

8,900

7,875

22,557

20,315

Financing

Proceeds from issuance of    short-term debt, maturities of

   90 days or less, net

0

3,759

0

49

Proceeds from issuance of debt

0

3,229

0

7,183

Repayments of debt

(3,000)

(3,327)

(3,000)

(4,496)

Common stock issued

200

189

560

496

Common stock repurchased

(6,413)

(2,008)

(10,157)

(4,578)

Common stock cash dividends paid

(3,544)

(3,238)

(6,764)

(6,241)

Other, net

(459)

(156)

(1,239)

(306)

         Net cash used in financing

(13,216)

(1,552)

(20,600)

(7,893)

Investing

Additions to property and equipment

(3,707)

(2,586)

(7,309)

(4,718)

Acquisition of companies, net of    cash acquired, and purchases of

   intangible and other assets

(1,593)

(27)

(1,838)

(206)

Purchases of investments

(16,858)

(45,154)

(36,409)

(78,115)

Maturities of investments

3,782

6,352

8,996

11,578

Sales of investments

14,176

41,261

29,407

64,297

Securities lending payable

0

(177)

0

(71)

         Net cash used in investing

(4,200)

(331)

(7,153)

(7,235)

Effect of foreign exchange rates on
   cash and cash equivalents

17

(17)

(112)

9

Net change in cash and cash equivalents

(8,499)

5,975

(5,308)

5,196

Cash and cash equivalents,
   beginning of period

15,137

6,884

11,946

7,663

Cash and cash equivalents, end of period

 $6,638

 $12,859

 $6,638

 $12,859


SEGMENT REVENUE AND OPERATING INCOME

(In millions)(Unaudited)

Three Months Ended

December 31,

Six Months Ended

December 31,

2018

2017

2018

2017

Revenue

Productivity and Business Processes

 $10,100

 $8,953

 $19,871

 $17,191

Intelligent Cloud

9,378

7,795

17,945

14,717

More Personal Computing

12,993

12,170

23,739

21,548

  Total

 $32,471

 $28,918

 $61,555

 $53,456

Operating Income

Productivity and Business Processes

 $4,015

 $3,337

 $7,896

 $6,343

Intelligent Cloud

3,279

2,832

6,210

4,969

More Personal Computing

2,964

2,510

6,107

5,075

  Total

 $10,258

 $8,679

 $20,213

 $16,387