Microsoft Reports $6.5 Billion in Net Income for FY 2017 Q4

Recurring revenue surpasses traditional licensing revenue for the first time.

Subscription News: Microsoft Reports $6.5 Billion in Net Income for FY 2017 Q4

Source: Microsoft

Last Thursday Microsoft Corp. (NASDAQ: MSFT) announced its fourth quarter results for its fiscal year ending June 30, 2017, including total revenue of $23.3 billion, operating income of $5.3 billion, net income of $6.5 billion and diluted earnings per share of $0.83. All figures reported are GAAP. The company credits its growing cloud business for its strong fourth quarter results, citing a commercial cloud annualized revenue run rate (ARR) in excess of $18.9 billion. The company’s goal is to achieve a commercial cloud ARR of $20 billion in fiscal 2018.

“Innovation across our cloud platforms drove strong results this quarter,” said Satya Nadella, Microsoft CEO, in a statement. “Customers are looking to Microsoft and our thriving partner ecosystem to accelerate their own digital transformations and to unlock new opportunity in this era of intelligent cloud and intelligent edge.”

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Subscription News: Microsoft Reports $6.5 Billion in Net Income for FY 2017 Q4

Source: Microsoft

“I’m proud of the progress, particularly the strength of our commercial cloud results. FY17 all up was a tremendous year of customer momentum with cloud, AI progress and digital transformation,” said Nadella on the earnings call. “Our technology world view of an Intelligent Cloud and an Intelligent Edge is resonating with businesses everywhere. Every customer I talk to is looking for both innovative technology to drive new growth as well as a strategic partner who can help build their own digital capability. Microsoft is a that trusted partner.”

Other Q4 highlights include:

  • Revenue in Productivity and Business Processes was $8.4 billion, a 21 percent increase year-over year.
  • Office commercial products and cloud services revenue increased $277 million, or 5 percent, driven by Office 365 commercial revenue growth of 43 percent year-over-year.
  • Office 365 Commercial revenue surpassed revenue from Microsoft’s traditional licensing business for the first time
  • Office consumer products and cloud services revenue increased 13 percent and Office 365 consumer subscribers increased to 27.0 million, up from 26.2 million in Q3.
  • LinkedIn contributed revenue of $1.1 billion, driven by revenue from Talent Solutions. [Note: LinkedIn also racked up $1.0 billion in operating expenses, including $154 million of amortization of acquired intangible assets.]
  • Revenue in Intelligent Cloud was $7.4 billion, an 11 percent increase, year-over-year.
  • Server products and cloud services revenue increased 15 percent, driven by Azure revenue growth of 97 percent.
  • Enterprise Services decreased 3 percent with declines in custom support agreements offset by growth in Premier Support Services.
  • Revenue in More Personal Computing was $8.8 billion, a 2 percent decrease due to lower phone revenue.
  • Gaming revenue increased 3 percent as revenue from Xbox software and services offset lower revenue from hardware.
  • Cost of revenue increased $477 million, or 6 percent, mainly due to growth in commercial cloud business and the acquisition of LinkedIn.
  • Research and development expenses increased $368 million, or 12 percent, primarily due to LinkedIn expenses and increased investments in cloud engineering.
  • Impairment and restructuring expenses were $306 million, compared to $1.1 billion year-over-year. The $306 million was recorded in Q4 to account for employee severance expenses from the company’s sales and marketing restructuring plan, announced earlier this month.
  • Microsoft returned $4.6 billion to shareholders in the form of share repurchases and dividends during Q4.

For its fiscal year end, Microsoft reported the following:

  • Revenue of $90.0 billion GAAP
  • Operating income of $22.3 billion GAAP
  • Net income of $21.2 billion GAAP
  • Diluted earnings per share of $2.71 GAAP

Subscription News: Microsoft Reports $6.5 Billion in Net Income for FY 2017 Q4

Source: Microsoft

Microsoft also noted in its earnings report that it was adopting the new revenue recognition standards, ASU 606, established by the Financial Accounting Standards Board (FASB) as of July 1, 2017. According to FASB, the new revenue standard applies to annual reporting periods beginning after December 15, 2017. Organizations are permitted to adopt the standards early. This change will have the greatest impact on revenue from Windows 10 licensing. Microsoft said it would release additional information in August on how it is adopting the new standard.

During the earnings call, Nadella addressed Microsoft’s investment in Linked.

“We are investing in the LinkedIn flagship experience to create new value for members and customers and accelerate growth,” Nadella said. “We saw continued momentum in mobile and strong engagement across the platform, with sessions up more than 20 percent for the third consecutive quarter. And we continue to innovate new ways for members to maximize the value of the platform.”

Nadella concluded his portion of the earnings call with this statement:

“As technology disrupts every industry and has the power to make a difference in the lives of everyone, we strive to create local opportunity, growth and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness and public sector efficiency. They also support new startups, improve educational and health outcomes and empower human ingenuity. Our sense of purpose lies in our customers’ success,” Nadella said.

“Transformation is a continuous process of renewal and reinvestment. We will continue to invest in the highest growth opportunities, lead innovation in the cloud and AI, and bring our technology and products together into experiences and solutions that unlock new value for customers,” he concluded.

Microsoft provided the following outlook for the year ahead:

  • They’ll see an increasing demand for cloud services and “healthy renewals.”
  • Commercial transactional business will continue to decrease as customers transition to the cloud.
  • The company will focus on improving commercial cloud gross margin percentage in each of their cloud services.
  • Microsoft will increase their capital investment to meet growing demand and capacity needs.

The company offered the following guidance for the first quarter of fiscal year 2018.

  • Commercial unearned revenue between $24.85 billion and $25.05 billion.
  • In Productivity and Business Processes, they estimate revenue between $8.1 billion and $8.3 billion.
  • Intelligent Cloud revenue will range between $6.9 billion and $7.1 billion.
  • Enterprises Services revenue is expected to decline.
  • More Personal Computing revenue will range between $8.6 billion and $8.9 billion.
  • Operating expenses will range between $8.6 billion and $8.7 billion with about $1 billion from LinkedIn.

The fourth quarter results did not have a significant impact on Microsoft’s stock which closed at $74.22 per share on Thursday, July 22. It dropped slightly to $73.79 in after-hours trading Friday, July 23. These figures are an improvement, however, over stock prices after Microsoft announced thousands of layoffs on Wednesday, July 5. Microsoft’s stock price that day was $69.08. Compare these stock prices to Microsoft’s value a year ago – $56.73 on July 26, 2016.

Subscription News: Microsoft Reports $6.5 Billion in Net Income for FY 2017 Q4

Source: Google Finance – Yahoo Finance – MSN Money

Insider Take:

Microsoft’s earnings report rarely disappoints, and this quarter is no different. The company has made incredible strides in certain areas like Azure revenue (97 percent increase), LinkedIn revenue of $1.1 billion and its growth in gaming. While growth in that area was only 3 percent, there is an opportunity for Microsoft here, particularly as their Xbox Game Pass subscription gains subscribers. LinkedIn is also an area of investment and opportunity for Microsoft, and they aren’t wasting time making the most of the $26.2 billion LinkedIn acquisition last year.

It will be interesting to see how Microsoft’s restructuring will impact its costs and revenue during fiscal year 2018. We are also curious to see how the new Microsoft 365 Enterprise and Microsoft 365 Business products will impact Microsoft’s bottom line over the course of the next year. As always, we’ll keep you updated on what the technology giant is up to, particularly in the world of subscriptions.