Microsoft Zooms on Strength of Azure Cloud Offerings

Commercial cloud annualized revenue run rate exceeds $12.1 billion

Source: Company's Website
Source: Company’s Website

Technology giant Microsoft Corp. (NASDAQ: MSFT) announced its Q4 FY16 and full-year FY16 financial results on July 19th, 2016. Headquartered in Redmond, Washington, Microsoft develops, licenses, and supports a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to customers. Microsoft operates in four segments: Productivity and Business Processes, Intelligent Cloud, More Personal Computing, and Corporate and Other.

The Company’s products include operating systems for computers, servers and server applications for distributed computing; desktop and server management tools; and software development tools. It also offers cloud-based solutions that provide customers with software, services, and content over the Internet by way of shared computing resources located in centralized data centers. Its cloud-based computing services include Bing, Microsoft Azure, Microsoft Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype, Xbox Live, and Yammer. It also provides consulting and product & solution support services as well as trains and certifies system integrators and developers. Microsoft has offices in over 100 countries. Read more about Microsoft’s financial results below.

Q4 FY16 financial highlights

Microsoft’s Q4 FY16 GAAP revenue fell 7% to $20.61 billion as compared to $22.18 billion reported in the year-ago period. On a non-GAAP basis, the technology firm reported a 5% growth in revenue to $22.64 billion compared to $22.18 billion in the prior year quarter.

Source: Company's Presentation
Source: Company’s Presentation

Similar to its rivals Cisco Systems Inc. (NASDAQ: CSCO) and Oracle Corp. (NYSE: ORCL), Microsoft is focusing on reinventing itself as a business technology services company. CEO Satya Nadella is channeling all efforts to steer Microsoft from a PC software maker to a company that sells business technology services, cloud-based services, and subscription products. Although the cloud is driving Microsoft’s results, it only accounts for a small part of the Company’s overall business, while PC software still accounts for a hefty chunk of Microsoft’s top line. Microsoft is faced with the challenge of scaling up its cloud and subscription businesses at a faster clip than the slowdown of its legacy operations.

Microsoft’s Productivity and Business Processes segment grew 5% (up 8% in constant currency) to $7.0 billion during Q4 FY16 as compared to the year-ago quarter. Under this segment, Office commercial products and cloud services revenue grew 5% (up 9% in constant currency), driven by Office 365 commercial revenue growth of 54% (up 59% in constant currency). Office consumer products and cloud services revenue grew 19% (up 18% in constant currency) with Office 365 consumer subscribers increasing to 23.1 million. Dynamics products and cloud services revenue grew 6% (up 7% in constant currency) with Dynamics CRM Online paid seats growing more than 2.5 times on a Y-o-Y basis during Q4 FY16.

Source: Company's Presentation
Source: Company’s Presentation

Microsoft’s Intelligent Cloud segment revenue grew 7% (up 10% in constant currency) to $6.7 billion during Q4 FY16 as compared to the year-ago quarter. Under this segment, server products and cloud services revenue increased 5% (up 8% in constant currency) driven by double-digit annuity revenue growth. Azure, which competes with Amazon.com Inc.’s (NASDAQ: AMZN) Amazon Web Services, posted revenue jump of 102% (up 108% in constant currency) with Azure compute usage more than doubling Y-o-Y. Enterprise Mobility customers nearly doubled Y-o-Y to over 33,000, and the installed base grew nearly 2.5 times on a Y-o-Y basis during Q4 FY16.

Source: Company's Presentation
Source: Company’s Presentation

Microsoft’s More Personal Computing segment revenue declined 4% (down 2% in constant currency) to $8.9 billion during Q4 FY16 as compared to the year-ago quarter, mainly on account of phone revenue nose-diving by 71% (down 70% in constant currency). On the brighter side, Windows OEM non-Pro revenue grew 27% (up 27% in constant currency), outpacing the consumer PC market, while Windows OEM Pro revenue grew 2% (up 2% in constant currency). Surface revenue increased 9% (up 9% in constant currency) driven by Surface Pro 4 and Surface Book, Xbox Live monthly active users grew 33% Y-o-Y to 49 million, and search advertising revenue, excluding traffic acquisition costs, grew 16% (up 17% in constant currency) with the benefit from Windows 10 usage.

The technology giant’s non-GAAP operating income declined 2% to $6.2 billion during Q4 FY16 (up 6% in constant currency). Lastly, Q4 FY16 net income grew by a solid 8% to $5.5 billion (up 23% in constant currency). Q4 FY16 Diluted EPS jumped 11% to $0.69 (up 27% in constant currency).

Share Repurchase

During the reporting quarter, Microsoft returned $6.4 billion to shareholders in the form of share repurchases and dividends.

Full year FY16 financial highlights

Microsoft’s FY16 GAAP revenue declined 9% to $85.32 billion as compared to the previous year. On a non-GAAP basis, the Company’s FY16 revenue declined 2% to $91.96 billion. Microsoft’s GAAP operating income for FY16 grew 11% to $20.18 billion, but fell 1% to $27.93 billion on a non-GAAP basis.

The software company’s GAAP net income for the year jumped 38% to $16.79 billion, but grew only 3% to $22.32 billion on a non-GAAP basis. Lastly, Microsoft’s GAAP diluted EPS jumped 42% to $2.10 and non-GAAP EPS grew 6% to $2.79.

Guidance for FY17

Going forward, Microsoft is projecting that its annualized revenue run rate for cloud products will be more than $12.1 billion.

Other highlights

Microsoft has proposed to acquire professional social network LinkedIn Corp. (NYSE: LNKD) for $26.2 billion in one of the largest tech deals so far, as reported by Bloomberg on June 13th, 2016. The LinkedIn deal is largely seen as CEO Nadella’s efforts to revamp the company and shift towards software and services delivered over the Internet as the Company focuses on business customers with cloud-based services and productivity tools. Microsoft will pay $196 per share in an all-cash deal, including LinkedIn’s net cash, a 49.5% premium to LinkedIn’s closing price on Friday, June 10th, 2016. LinkedIn will retain its brand name and remain an independent company under CEO Jeff Weiner.

Source: Company's Website
Source: Company’s Website

Microsoft is also channeling all efforts to put Windows 10 on as many devices as possible, including smartphones, personal computers, laptops, and its Xbox gaming consoles. Microsoft is aiming to create a huge user base for the Windows 10, and thereby has been prompting developers to create meaningful apps to lure mobile customers onto the platform. Keeping with this game plan, Microsoft announced on June 1st, 2016, that it is selling about 1,500 of its patents to Chinese device maker Xiaomi. The deal, which revolves around its flagship operating system Windows 10, also includes a patent cross-licensing arrangement as per which Xiaomi will install Microsoft software, including Office and Skype, on its phones and tablets. The Windows 10 platform, which Microsoft launched globally on July 29th, 2015, currently runs on 300 million plus active devices including smartphones, PCs, tablets, and gaming consoles.

Stock Performance

M6Microsoft’s stock stood at $55.80, dipping 0.20%, at the close on Thursday, July 21st, 2016, having vacillated between an intraday high of $56.23 and a low of $55.76 during the session. The stock’s trading volume was at 32,751,891 for the day. The Company’s market cap was at $438.94 billion as of Thursday’s close.

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