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Earnings Release FY20 Q2

Microsoft Commercial Strength Powers Second Quarter Results

REDMOND, Wash. — January 29, 2020 — Microsoft Corp. today announced the following results for the quarter ended December 31, 2019, as compared to the corresponding period of last fiscal year:

·        Revenue was $36.9 billion and increased 14%

·        Operating income was $13.9 billion and increased 35%

·        Net income was $11.6 billion and increased 38% GAAP and 36% non-GAAP

·        Diluted earnings per share was $1.51 and increased 40% GAAP and 37% non-GAAP

“We are innovating across every layer of our differentiated technology stack and leading in key secular areas that are critical to our customers’ success,” said Satya Nadella, chief executive officer of Microsoft. “Along with our expanding opportunity, we are working to ensure the technology we build is inclusive, trusted and creates a more sustainable world, so every person and every organization can benefit.”

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

Diluted Earnings per Share

2018 As Reported (GAAP)

$32,471

$10,258

$8,420

$1.08

  Net Impact of the Tax Cuts and Jobs Act (TCJA)

-

-

157

0.02

2018 As Adjusted (non-GAAP)

$32,471

$10,258

$8,577

$1.10

2019 As Reported (GAAP)

$36,906

$13,891

$11,649

$1.51

Percentage Change Y/Y (GAAP)

14%

35%

38%

40%

Percentage Change Y/Y (non-GAAP)

14%

35%

36%

37%

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

15%

39%

39%

41%

 

GAAP results include a net income tax charge related to the TCJA of $157 million for the second quarter of fiscal year 2019. This net income tax charge is excluded from our non-GAAP results.

Microsoft returned $8.5 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2020.

"Strong execution from our sales teams and partners drove Commercial Cloud revenue to $12.5 billion, up 39% year over year," said Amy Hood, executive vice president and chief financial officer of Microsoft.

Revenue in Productivity and Business Processes was $11.8 billion and increased 17% (up 19% in constant currency), with the following business highlights:

·        Office Commercial products and cloud services revenue increased 16% (up 18% in constant currency) driven by Office 365 Commercial revenue growth of 27% (up 30% in constant currency)

·        Office Consumer products and cloud services revenue increased 19% (up 20% in constant currency) with continued growth in Office 365 Consumer subscribers to 37.2 million

·        LinkedIn revenue increased 24% (up 26% in constant currency)

·        Dynamics products and cloud services revenue increased 12% (up 15% in constant currency) driven by Dynamics 365 revenue growth of 42% (up 45% in constant currency)

Revenue in Intelligent Cloud was $11.9 billion and increased 27% (up 28% in constant currency), with the following business highlights:

·        Server products and cloud services revenue increased 30% (up 32% in constant currency) driven by Azure revenue growth of 62% (up 64% in constant currency)

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

Revenue in More Personal Computing was $13.2 billion and increased 2% (up 3% in constant currency), with the following business highlights:

·        Windows OEM revenue increased 18% (up 18% in constant currency)

·        Windows Commercial products and cloud services revenue increased 25% (up 27% in constant currency)

·        Surface revenue increased 6% (up 8% in constant currency)

·        Search advertising revenue excluding traffic acquisition costs increased 6% (up 7% in constant currency)

·        Xbox content and services revenue decreased 11% (down 9% 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.

 

Environmental, Social, and Governance (ESG)

 

To better execute on Microsoft’s mission, we focus our Environmental, Social, and Governance (ESG) efforts where we can have the most positive impact. To learn more about our latest initiatives and priorities, please visit our investor relations ESG website. 

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 January 29, 2021.

Non-GAAP Definition

We recorded a net charge of $157 million during the three months ended December 31, 2018 related to the TCJA.

We have provided non-GAAP financial measures related to the TCJA to aid investors in better understanding our performance. We believe these non-GAAP measures assist 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

Diluted Earnings per Share

2018 As Reported (GAAP)

$32,471_

$10,258_

$8,420_

$1.08_

2018 As Adjusted (non-GAAP)

$32,471_

$10,258_

$8,577_

$1.10_

2019 As Reported

$36,906_

$13,891_

$11,649_

$1.51_

Percentage Change Y/Y (GAAP)

14%_

35%_

38%_

40%_

Percentage Change Y/Y (non-GAAP)

14%_

35%_

36%_

37%_

Constant Currency Impact

$(465)

$(408)

$(285)

$(0.04)

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

15%_

39%_

39%_

41%_

Segment Revenue Constant Currency Reconciliation

 

Three Months Ended December 31,

 ($ in millions)

Productivity and Business Processes

Intelligent Cloud

More Personal Computing

2018 As Reported

$10,100_

$9,378_

$12,993_

2019 As Reported

$11,826_

$11,869_

$13,211_

Percentage Change Y/Y

17%_

27%_

2%_

Constant Currency Impact

$(183)

$(165)

$(117)

Percentage Change Y/Y Constant Currency

19%_

28%_

3%_

 

Selected Product and Service Revenue Constant Currency Reconciliation           

 

Three Months Ended December 31, 2019

Percentage Change Y/Y (GAAP)

Constant Currency Impact

Percentage Change Y/Y Constant Currency

Office Commercial products and cloud services

16%

2%

18%

Office 365 Commercial

27%

3%

30%

Office Consumer products and cloud services

19%

1%

20%

LinkedIn

24%

2%

26%

Dynamics products and cloud services

12%

3%

15%

Dynamics 365

42%

3%

45%

Server products and cloud services

30%

2%

32%

Azure

62%

2%

64%

Enterprise Services

6%

1%

7%

Windows OEM

18%

0%

18%

Windows Commercial products and cloud services

25%

2%

27%

Search advertising excluding traffic acquisition costs

6%

1%

7%

Surface

6%

2%

8%

Xbox content and services

(11)%

2%

(9)%

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 AI in our offerings that may result in competitive harm, legal liability, or reputational harm;

·        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;

·        uncertainties relating to our business with government customers;

·        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 December 31, 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

December 31,

Six Months Ended

December 31,

 

2019

 

2018

 

2019

 

2018

Revenue:

   Product

 $18,255

 $16,219

 $34,023

 $33,518

   Service and other

18,651

16,252

35,938

28,037

      Total revenue

36,906

32,471

69,961

61,555

Cost of revenue:

   Product

4,966

5,885

8,271

9,534

   Service and other

7,392

6,538

14,493

12,794

      Total cost of revenue

12,358

12,423

22,764

22,328

      Gross margin

24,548

20,048

47,197

39,227

Research and development

4,603

4,070

9,168

8,047

Sales and marketing

4,933

4,588

9,270

8,686

General and administrative

1,121

1,132

2,182

2,281

Operating income

13,891

10,258

26,577

20,213

Other income, net

194

127

194

393

Income before income taxes

14,085

10,385

26,771

20,606

Provision for income taxes

2,436

1,965

4,444

3,362

Net income

 $11,649

 $8,420

 $22,327

 $17,244

Earnings per share:

   Basic

 $1.53

 $1.09

 $2.93

 $2.24

   Diluted

 $1.51

 $1.08

 $2.90

 $2.22

Weighted average shares outstanding:

   Basic

7,621

7,692

7,628

7,683

   Diluted

7,691

 

7,768

 

7,701

 

7,767

 


 

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

 

2019

 

2018

 

2019

 

2018

Net income

 $11,649

 $8,420

 $22,327

 $17,244

Other comprehensive income (loss), net of tax:

  Net change related to derivatives

(4)

(15)

(6)

(60)

  Net change related to investments

(420)

881

157

620

  Translation adjustments and other

230

(264)

(66)

(319)

   Other comprehensive income (loss)

(194)

602

85

241

Comprehensive income

 $11,455

 $9,022

 $22,412

 $17,485

 


 

BALANCE SHEETS

(In millions) (Unaudited)


 

December 31,

2019

 

June 30,

2019

Assets

Current assets:

   Cash and cash equivalents

 $8,864

 $11,356

   Short-term investments

125,389

122,463

      Total cash, cash equivalents, and short-term investments

134,253

133,819

   Accounts receivable, net of allowance for doubtful
      accounts of $384 and $411

23,525

29,524

   Inventories

1,823

2,063

   Other current assets

7,473

10,146

      Total current assets

167,074

175,552

Property and equipment, net of accumulated
   depreciation of $39,597 and $35,330

40,522

36,477

Operating lease right-of-use assets

8,439

7,379

Equity investments

2,755

2,649

Goodwill

42,248

42,026

Intangible assets, net

7,126

7,750

Other long-term assets

14,630

14,723

            Total assets

 $282,794

 $286,556

Liabilities and stockholders' equity

Current liabilities:

   Accounts payable

 $8,811

 $9,382

   Current portion of long-term debt

6,247

5,516

   Accrued compensation

5,421

6,830

   Short-term income taxes

2,687

5,665

   Short-term unearned revenue

27,343

32,676

   Other current liabilities

9,131

9,351

      Total current liabilities

59,640

69,420

Long-term debt

63,361

66,662

Long-term income taxes

28,754

29,612

Long-term unearned revenue

3,878

4,530

Deferred income taxes

222

233

Operating lease liabilities

7,172

6,188

Other long-term liabilities

9,658

7,581

         Total liabilities

172,685

184,226

Commitments and contingencies

Stockholders' equity:

   Common stock and paid-in capital - shares
      authorized 24,000; outstanding 7,611 and 7,643

79,625

78,520

   Retained earnings

30,739

24,150

   Accumulated other comprehensive loss

(255)

(340)

         Total stockholders' equity

110,109

102,330

            Total liabilities and stockholders' equity

 $282,794

 $286,556

 

CASH FLOWS STATEMENTS

(In millions) (Unaudited)


Three Months Ended

December 31,

Six Months Ended

December 31,

 

2019

 

2018

 

2019

 

2018

Operations

Net income

 $11,649

 $8,420

 $22,327

$17,244

Adjustments to reconcile net income
   to net cash from operations:

   Depreciation, amortization, and other

3,203

2,995

6,174

5,832

   Stock-based compensation expense

1,340

1,183

2,602

2,290

   Net recognized gains on
      investments and derivatives

(203)

(135)

(192)

(375)

   Deferred income taxes

(53)

(173)

(230)

(420)

   Changes in operating assets and
      liabilities:

      Accounts receivable

(4,203)

(2,396)

5,887

6,798

      Inventories

799

1,654

238

698

      Other current assets

165

(173)

(273)

(850)

      Other long-term assets

(517)

(473)

(850)

(452)

      Accounts payable

(7)

(440)

(554)

(835)

      Unearned revenue

(2,936)

(2,122)

(5,828)

(4,563)

      Income taxes

(471)

(64)

(3,807)

(1,155)

      Other current liabilities

1,489

656

(1,831)

(1,666)

      Other long-term liabilities

425

(32)

835

11

         Net cash from operations

10,680

8,900

24,498

22,557

Financing

Repayments of debt

(18)

(3,000)

(2,518)

(3,000)

Common stock issued

234

200

661

560

Common stock repurchased

(5,206)

(6,413)

(10,118)

(10,157)

Common stock cash dividends paid

(3,886)

(3,544)

(7,396)

(6,764)

Other, net

(39)

(459)

247

(1,239)

         Net cash used in financing

(8,915)

(13,216)

(19,124)

(20,600)

Investing

Additions to property and equipment

(3,545)

(3,707)

(6,930)

(7,309)

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

(80)

(1,593)

(542)

(1,838)

Purchases of investments

(19,011)

(16,858)

(42,401)

(36,409)

Maturities of investments

11,230

3,782

30,312

8,996

Sales of investments

5,370

14,176

11,749

29,407

         Net cash used in investing

(6,036)

(4,200)

(7,812)

(7,153)

Effect of foreign exchange rates on
   cash and cash equivalents

18

17

(54)

(112)

Net change in cash and cash equivalents

(4,253)

(8,499)

(2,492)

(5,308)

Cash and cash equivalents,
   beginning of period

13,117

15,137

11,356

11,946

Cash and cash equivalents, end of period

 $8,864

 $6,638

 $8,864

 $6,638

 


SEGMENT REVENUE AND OPERATING INCOME

(In millions) (Unaudited)


 

Three Months Ended

December 31,

 

Six Months Ended

December 31,

 

 

 

2019

 

2018

 

2019

 

2018

Revenue

 

 

 

 

 

 

 

Productivity and Business Processes

 $11,826

 

 $10,100

 

 $22,903

 

 $19,871

Intelligent Cloud

11,869

 

9,378

 

22,714

 

17,945

More Personal Computing

13,211

 

12,993

 

24,344

 

23,739

  Total

 $36,906

 

 $32,471

 

 $69,961

 

 $61,555

Operating Income

 

 

 

 

 

 

 

Productivity and Business Processes

 $5,182

 

 $4,015

 

 $9,964

 

 $7,896

Intelligent Cloud

4,531

 

3,279

 

8,420

 

6,210

More Personal Computing

4,178

 

2,964

 

8,193

 

6,107

  Total

 $13,891

 

 $10,258

 

 $26,577

 

 $20,213

 

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