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Earnings Release FY20 Q1

Microsoft Cloud Strength Drives First Quarter Results

REDMOND, Wash. — October 23, 2019 — Microsoft Corp. today announced the following results for the quarter ended September 30, 2019, as compared to the corresponding period of last fiscal year:

·         Revenue was $33.1 billion and increased 14%

·         Operating income was $12.7 billion and increased 27%

·         Net income was $10.7 billion and increased 21%

·         Diluted earnings per share was $1.38 and increased 21%

“The world’s leading companies are choosing our cloud to build their digital capability,” said Satya Nadella, chief executive officer of Microsoft. “We are accelerating our innovation across the entire tech stack to deliver new value for customers and investing in large and growing markets with expansive opportunity.”

Microsoft returned $7.9 billion to shareholders in the form of dividends and share repurchases in the first quarter of fiscal year 2020, an increase of 28% compared to the first quarter of fiscal year 2019.

"It was a strong start to the fiscal year with our commercial cloud generating $11.6 billion in revenue for the quarter, up 36% year over year,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

Revenue in Productivity and Business Processes was $11.1 billion and increased 13% (up 15% in constant currency), with the following business highlights:

·         Office Commercial products and cloud services revenue increased 13% (up 15% in constant currency) driven by Office 365 Commercial revenue growth of 25% (up 28% in constant currency)

·         Office Consumer products and cloud services revenue increased 5% (up 6% in constant currency) with continued growth in Office 365 Consumer subscribers to 35.6 million

·         LinkedIn revenue increased 25% (up 26% in constant currency)

·         Dynamics products and cloud services revenue increased 14% (up 16% in constant currency) driven by Dynamics 365 revenue growth of 41% (up 44% in constant currency)

Revenue in Intelligent Cloud was $10.8 billion and increased 27% (up 29% in constant currency), with the following business highlights:

·         Server products and cloud services revenue increased 30% (up 33% in constant currency) driven by Azure revenue growth of 59% (up 63% in constant currency)

·         Enterprise Services revenue increased 7% (up 8% in constant currency)

Revenue in More Personal Computing was $11.1 billion and increased 4% (up 5% in constant currency), with the following business highlights:

·         Windows OEM revenue increased 9% (up 9% in constant currency)

·         Windows Commercial products and cloud services revenue increased 26% (up 29% in constant currency)

·         Search advertising revenue excluding traffic acquisition costs increased 11% (up 13% in constant currency)

·         Xbox content and services revenue was relatively unchanged (up 1% in constant currency)  

·         Surface revenue decreased 4% (down 2% 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, 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 at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on October 23, 2020.

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 generally accepted accounting principles (GAAP).


Financial Performance Constant Currency Reconciliation

 

Three Months Ended September 30,

 ($ in millions, except per share amounts)

Revenue

Operating Income

Net Income

Diluted Earnings per Share

2018 As Reported

$29,084_

$9,955_

$8,824_

$1.14_

2019 As Reported

$33,055_

$12,686_

$10,678_

$1.38_

Percentage Change Y/Y

14%_

27%_

21%_

21%_

Constant Currency Impact

$(507)

$(409)

$(375)

$(0.05)

Percentage Change Y/Y Constant Currency

15%_

32%_

25%_

25%_

 

Segment Revenue Constant Currency Reconciliation

 

Three Months Ended September 30,

 ($ in millions)

Productivity and Business Processes

Intelligent Cloud

More Personal Computing

2018 As Reported

$9,771_

$8,567_

$10,746_

2019 As Reported

$11,077_

$10,845_

$11,133_

Percentage Change Y/Y

13%_

27%_

4%_

Constant Currency Impact

$(196)

$(200)

$(111)

Percentage Change Y/Y Constant Currency

15%_

29%_

5%_

 

Selected Product and Service Revenue Constant Currency Reconciliation       

 

Three Months Ended September 30, 2019

Percentage Change Y/Y (GAAP)

Constant Currency Impact

Percentage Change Y/Y Constant Currency

Office commercial products and cloud services

13%

2%

15%

Office 365 commercial

25%

3%

28%

Office consumer products and cloud services

5%

1%

6%

LinkedIn

25%

1%

26%

Dynamics products and cloud services

14%

2%

16%

Dynamics 365

41%

3%

44%

Server products and cloud services

30%

3%

33%

Azure

59%

4%

63%

Enterprise Services

7%

1%

8%

Windows OEM

9%

0%

9%

Windows commercial products and cloud services

26%

3%

29%

Search advertising excluding traffic acquisition costs

11%

2%

13%

Surface

(4)%

2%

(2)%

Xbox content and services

0%

1%

1%

 


 

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 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;

·         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;

·         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

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

·         quality or supply problems;

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

·         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;

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

·         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;

·         additional tax liabilities;

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

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

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

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

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

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 September 30, 2019. 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

September 30,

 

2019

 

2018

Revenue:

   Product

 $15,768

 $17,299

   Service and other

17,287

11,785

      Total revenue

33,055

29,084

Cost of revenue:

   Product

3,305

3,649

   Service and other

7,101

6,256

      Total cost of revenue

10,406

9,905

      Gross margin

22,649

19,179

Research and development

4,565

3,977

Sales and marketing

4,337

4,098

General and administrative

1,061

1,149

Operating income

12,686

9,955

Other income, net

0

266

Income before income taxes

12,686

10,221

Provision for income taxes

2,008

1,397

Net income

 $10,678

 $8,824

Earnings per share:

   Basic

 $1.40

 $1.15

   Diluted

 $1.38

 $1.14

Weighted average shares outstanding:

   Basic

7,634

7,673

   Diluted

7,710

 

7,766

 


 

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)


Three Months Ended

September 30,

 

2019

 

2018

Net income

 $10,678

 $8,824

Other comprehensive income (loss), net of tax:

  Net change related to derivatives

(2)

(45)

  Net change related to investments

577

(261)

  Translation adjustments and other

(296)

(55)

    Other comprehensive income (loss)

279

(361)

Comprehensive income

 $10,957

 $8,463

 


 

BALANCE SHEETS

(In millions) (Unaudited)


 

September 30,

2019

 

June 30,

2019

Assets

Current assets:

   Cash and cash equivalents

 $13,117

 $11,356

   Short-term investments

123,519

122,463

      Total cash, cash equivalents, and short-term investments

136,636

133,819

   Accounts receivable, net of allowance for doubtful
      accounts of $303 and $411

19,087

29,524

   Inventories

2,622

2,063

   Other current assets

7,551

10,146

      Total current assets

165,896

175,552

Property and equipment, net of accumulated
   depreciation of $36,971 and $35,330

38,409

36,477

Operating lease right-of-use assets

7,890

7,379

Equity investments

2,684

2,649

Goodwill

42,113

42,026

Intangible assets, net

7,508

7,750

Other long-term assets

14,455

14,723

            Total assets

 $278,955

 $286,556

Liabilities and stockholders' equity

Current liabilities:

   Accounts payable

 $8,574

 $9,382

   Current portion of long-term debt

3,017

5,516

   Accrued compensation

4,676

6,830

   Short-term income taxes

3,440

5,665

   Short-term unearned revenue

29,904

32,676

   Other current liabilities

8,507

9,351

      Total current liabilities

58,118

69,420

Long-term debt

66,478

66,662

Long-term income taxes

28,457

29,612

Long-term unearned revenue

4,122

4,530

Deferred income taxes

234

233

Operating lease liabilities

6,659

6,188

Other long-term liabilities

8,826

7,581

         Total liabilities

172,894

184,226

Commitments and contingencies

Stockholders' equity:

   Common stock and paid-in capital - shares
      authorized 24,000; outstanding 7,634 and 7,643

78,882

78,520

   Retained earnings

27,240

24,150

   Accumulated other comprehensive loss

(61)

(340)

         Total stockholders' equity

106,061

102,330

            Total liabilities and stockholders' equity

 $278,955

 $286,556


 

CASH FLOWS STATEMENTS

(In millions) (Unaudited)


Three Months Ended

September 30,

 

2019

 

2018

Operations

Net income

 $10,678

 $8,824

Adjustments to reconcile net income
  to net cash from operations:

  Depreciation, amortization, and other

2,971

2,837

  Stock-based compensation expense

1,262

1,107

  Net recognized losses (gains) on
      investments and derivatives

11

(240)

  Deferred income taxes

(177)

(247)

  Changes in operating assets and liabilities:

    Accounts receivable

10,090

9,194

    Inventories

(561)

(956)

    Other current assets

(438)

(677)

    Other long-term assets

(333)

21

    Accounts payable

(547)

(395)

    Unearned revenue

(2,892)

(2,441)

    Income taxes

(3,336)

(1,091)

    Other current liabilities

(3,320)

(2,322)

    Other long-term liabilities

410

43

        Net cash from operations

13,818

13,657

Financing

Repayments of debt

(2,500)

0

Common stock issued

427

360

Common stock repurchased

(4,912)

(3,744)

Common stock cash dividends paid

(3,510)

(3,220)

Other, net

286

(780)

        Net cash used in financing

(10,209)

(7,384)

Investing

Additions to property and equipment

(3,385)

(3,602)

Acquisition of companies, net of cash acquired,
  and purchases of intangible and other assets

(462)

(245)

Purchases of investments

(23,390)

(19,551)

Maturities of investments

19,082

5,214

Sales of investments

6,379

15,231

        Net cash used in investing

(1,776)

(2,953)

Effect of foreign exchange rates on cash and cash
   equivalents

(72)

(129)

Net change in cash and cash equivalents

1,761

3,191

Cash and cash equivalents, beginning of period

11,356

11,946

Cash and cash equivalents, end of period

 $13,117

 $15,137

 

 

SEGMENT REVENUE AND OPERATING INCOME

(In millions) (Unaudited)

 

Three Months Ended

September 30,

 

 

2019

 

2018

Revenue

 

 

 

Productivity and Business Processes

 $11,077

 

 $9,771

Intelligent Cloud

10,845

 

8,567

More Personal Computing

11,133

 

10,746

  Total

 $33,055

 

 $29,084

Operating Income

 

 

 

Productivity and Business Processes

 $4,782

 

 $3,881

Intelligent Cloud

3,889

 

2,931

More Personal Computing

4,015

 

3,143

  Total

 $12,686

 

 $9,955

 

IMPORTANT NOTICE TO USERS (summary only, click here  for full text of notice); All information is unaudited unless otherwise noted or accompanied by an audit opinion and is subject to the more comprehensive information contained in our SEC reports and filings. We do not endorse third-party information. All information speaks as of the last fiscal quarter or year for which we have filed a Form 10-K or 10-Q, or for historical information the date or period expressly indicated in or with such information. We undertake no duty to update the information. Forward-looking statements are subject to risks and uncertainties described in our  Forms 10-Q and 10-K.

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Information contained in these documents is current as of the earnings date, and not restated for new accounting standards