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pww.comMicrosoft Corporation, Q2 2015 Earnings Call, Jan 26, 2015 - NasdaqGS:MSFT

NasdaqGS:MSFT

Satya Nadella [Chairman & CEO] 💬

Satya Nadella, the Chairman and CEO of Microsoft, provided an overview of Microsoft’s performance and progress during the Q2 2015 Earnings Call. Here are the detailed points he addressed:

Overall Progress and Transformation

  • Quarterly Results: Microsoft achieved $26.5 billion in revenue and an operating income of $7.8 billion.
  • Business Transformation: Highlighted successes in cloud adoption, redefining the Windows ecosystem, and improving hardware portfolio economics.
  • Challenges: Addressed the end of the Windows XP refresh cycle and unexpected issues in select geographies.

Cloud Business

  • Revenue Growth: Sixth consecutive quarter of triple-digit revenue growth in commercial cloud, reaching a run rate of $5.5 billion.
  • Azure Services: Growth in appeal to enterprise IT and developers with improvements in hybrid services, premium cloud storage, virtual machines, and data analytics.
  • Enterprise Mobility Suite (EMS): Noted the comprehensive solution for all devices, integrating mobile device management, mobile application management, hybrid identity management, and data protection.
  • Office 365: New application experiences on phones and tablets, including Sway, Delve, Office 365 Groups, and Office 365 Video.
  • Dynamics CRM Online: Expanded to 130 markets worldwide, integrating with Cortana, Yammer, Power BI, and Skype.
  • Acquisitions: Announced the acquisition of Revolution Analytics, HockeyApp, Aorato, Equivio, and Acompli, emphasizing advanced data analytics and machine learning capabilities.

Consumer Cloud Services

  • Office 365 Home and Personal: Revenue grew nearly 150% YoY with 2.1 million net new subscribers.
  • Bing: Continued growth in U.S. search share and search revenue (+23%).

Windows

  • Windows Ecosystem: Diverse lineup of Windows devices showcased at CES, including premium devices.
  • Pricing Programs: Strategic decision to introduce new pricing programs for unit growth in opening price point PCs and tablets.
  • Windows 10: Highlighted the focus on building a device platform for the mobile-first, cloud-first world, emphasizing the importance of mobility, natural interaction, and trust.
  • Windows 10 Development Platform: Emphasized the attractiveness of Windows 10 for developers, with a free upgrade offer, universal applications, and a unified store.

Devices

  • Surface: Surpassed $1 billion in revenue for the first time, driven by the Surface Pro 3.
  • Lumia Phones: Sold 10.5 million units, an all-time high, focusing on affordable smartphones.
  • New Devices: Introduced the Microsoft Band, Surface Hub, and HoloLens, highlighting innovations in wearables, collaboration, and mixed reality.

Xbox

  • Xbox One: Top-selling console in the U.S. during the holiday season, with increased engagement on Xbox LIVE.
  • Windows 10 Integration: Optimism for the future of gaming with Windows 10, allowing cross-device gameplay and easy streaming to Windows 10 devices.

Capital Allocation

  • Cost Base Management: Unleashed innovation without materially growing the cost base, requiring clarity in purpose, realignment of talent, and disciplined execution.
  • Share Repurchase Authorization: Announced the intention to complete the existing $40 billion share repurchase authorization by December 31, 2016, showing optimism for future growth.

Closing Remarks

  • Transformation: Encouraged by the progress in transforming Microsoft into a productivity and platform company for the mobile-first, cloud-first world.

  • Team Execution: Proud of the team’s ability to step up and execute the transformation.

  • Confidence: Confident in the decisions and choices made to drive the business forward and serve customers and partners.

  • Handover: Handed over to Amy Hood for a detailed financial review and outlook.

Amy E. Hood [Executive VP & CFO] 💬

Amy E. Hood, the Executive Vice President and Chief Financial Officer of Microsoft Corporation, provided the following information and insights during the Q2 2015 Earnings Call:

  1. Financial Highlights of the Second Quarter:

    • Revenue was $26.5 billion, up 8%.
    • Gross margin grew slightly, with improved gross margin percentages in each operating segment.
    • Operating income declined 2%, including $243 million of integration and restructuring expenses.
    • Reported GAAP earnings per share (EPS) was $0.71, which included a $0.02 negative impact from integration and restructuring expenses and a $0.04 income tax charge for an IRS audit adjustment.

  2. Bookings and Unearned Revenue:

    • Bookings were flat this quarter due to the impact of foreign exchange (FX).
    • Unearned revenue was up 9% year-over-year to $21.2 billion, but the sequential decline was slightly higher than expected due to the larger-than-anticipated impact from FX.

  3. Geographic Performance:

    • The U.S. outperformed expectations, and Europe was generally in line.
    • China and Japan fell short of expectations due to macroeconomic challenges and the impact of the Windows XP end-of-support refresh cycle.

  4. Windows Business:

    • Windows Pro revenue growth was impacted by the return to a more normalized mix between developed and emerging markets and Pro attach to business PCs returning to pre-Windows XP end-of-support levels.
    • Windows non-Pro licenses and activations grew, driven by strong demand for opening price point PCs.
    • Inventory in the channel is a bit higher than normal, expected to work through in Q3.

  5. Office Consumer Products and Services:

    • Revenue declined 12% due to the ongoing transition to Office 365 and dynamics in Japan.
    • Adoption of Office 365 Home and Personal remained strong, with over 9.2 million subscribers.

  6. Surface Portfolio:

    • Strong interest in Surface Pro 3 helped drive record revenue and improved gross margin.
    • Surface Pro 3 volumes are pacing over 3x the rate of Surface Pro 2.

  7. Xbox Business:

    • Xbox One was the console sales leader in the U.S.
    • Xbox LIVE users grew, and users increased their purchases of third-party publisher content and consumables.
    • First-party games performed well, contributing to revenue growth.

  8. Phone Business:

    • Sold 10.5 million Lumia phones, an all-time high, driving volumes in the low-price device category.
    • Non-Lumia phone sales were over 39 million units, even while making changes to the product portfolio and managing the business for profitability.

  9. Revenue in Devices and Consumer Other Segment:

    • Grew 30%, driven by strong performance in Xbox LIVE transactions, first-party games, and search revenue.

  10. Commercial Cloud Services:

    • Delivered triple-digit revenue growth for the sixth consecutive quarter.
    • Office 365 continues to gain traction with CIOs, with 45% of renewal seats moving to the cloud this quarter.
    • Azure services experienced strong revenue growth, driven by increases in customer base and the number of services deployed.

  11. Operating Expense:

    • Grew 1% to $8.3 billion, favorable to expectations.
    • Excluding the addition of Nokia Devices and Services (NDS), operating expense would have declined 8%.

  12. Integration and Restructuring Efforts:

    • Optimizing resources across the company, including reducing the expense base in the phone business.
    • Committed to reducing $1 billion from the phone cost base, achieved as planned.

  13. Effective Tax Rate:

    • Was 25% and higher than expected due to an income tax charge for an IRS audit adjustment and the inclusion of phone results.

  14. Capital Expenditures:

    • Were $1.5 billion, driven by investments in data centers and server purchases to support the cloud business.

  15. Capital Return:

    • Increased by 5%, with $4.5 billion returned to shareholders through buybacks and dividends.

  16. Q3 Guidance:

    • Expected negative impact of FX on revenue growth by approximately 4 points.
    • Expected year-on-year revenue declines in China, Russia, and Japan.
    • Geographic dynamics, challenging comparables from XP, and FX headwinds expected to persist throughout the fiscal year.

  17. Specific Q3 Guidance:

    • Provided detailed guidance for Devices and Consumer, Commercial Licensing, and Commercial Other segments, including the impact of FX and expected trends in various product areas.

  18. Outlook:

    • Continued momentum in annuity and commercial cloud services.
    • Expected challenges from FX and the anniversary of the Windows XP end-of-support refresh cycle.

  19. Accounting Impacts of Windows 10:

    • Will share additional detailed information regarding any accounting impacts from the Windows 10 Free Upgrade Offer and Windows as a Service.
    • Confirmed that the OEM royalty model will remain in place.

  20. Cost of Goods Sold (COGS):

    • Expected to be $7.1 billion to $7.4 billion, with variability driven by hardware segments.

  21. Operating Expense:

    • Expected to be $8.2 billion to $8.4 billion for Q3.
    • Full-year guidance lowered to $33.2 billion to $33.6 billion, reducing full-year growth to 4% to 5%.

  22. Restructuring and Integration Expenses:

    • Expected additional $200 million of restructuring expense.
    • Total charges of roughly $1.4 billion, lower than previous guidance.
    • Integration expense of $100 million per quarter for the remainder of the fiscal year.

  23. Other Income and Expense:

    • Expected to be negative $100 million in Q3 due to the current FX environment.

  24. Tax Rate:

    • Expected full-year tax rate to be between 22% and 24%.

  25. Capital Expenditures:

    • Expected to sequentially increase in support of the growing cloud business.

  26. Unearned Revenue:

    • Expected low single-digit sequential decline in Q3, including a 1-point drag from FX.

  27. Closing Remarks:

    • Reiterated confidence in the underlying health of the business, excitement about significant innovation funded within the prioritized operating budget, and gaining share in key strategic markets.

Christopher Suh [Former Corporate VP & CFO of Cloud+ AI Group] 💬

During the Microsoft Corporation Q2 2015 Earnings Call on January 26, 2015, Christopher Suh, the Former Corporate Vice President and Chief Financial Officer of the Cloud+AI Group, made the following statements:

  1. Introduction:

    • Thanked participants and introduced other executives present on the call, including Satya Nadella (Chief Executive Officer), Amy Hood (Chief Financial Officer), Frank Brod (Chief Accounting Officer), and John Seethoff (Deputy General Counsel).

  2. Website Information:

    • Noted that the press release and a slide deck providing a summary of the quarter's results were posted on the Microsoft investor relations website at microsoft.com/investor.

  3. Growth Comparisons and Operating Expense Definition:

    • Clarified that all growth comparisons made during the call relate to the corresponding period of the previous year unless otherwise specified.
    • Defined any mention of operating expense as referring to segment operating expenses as defined in the footnotes of the company’s 10-Q, which includes research and development, sales and marketing, and general and administrative expenses but excludes integration and restructuring charges.

  4. Webcast and Recording Information:

    • Announced that the call was being webcast live and recorded.
    • Stated that if a participant asked a question, it would be included in the live transmission, the transcript, and in any future use of the recording.
    • Mentioned that the call and transcript would be available on the Microsoft Investor Relations website until January 26, 2016.

  5. Forward-Looking Statements Disclaimer:

    • Reminded listeners that the call would include forward-looking statements, which are predictions, projections, or other statements about future events.
    • Noted that actual results could materially differ from these statements due to risks and uncertainties.
    • Referenced the earnings press release, comments made during the conference call, and the Risk Factors section of the company’s Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission.
    • Stated that the company does not undertake any duty to update any forward-looking statement.

  6. Handover to Satya Nadella:

    • Indicated that he would turn the call over to Satya Nadella, the Chairman and CEO, to begin the presentation.

  7. Closing Remarks:

    • Thanked Amy Hood and Satya Nadella for their presentations.
    • Announced a briefing for the investor community on April 29 in conjunction with the Build Developer Conference in San Francisco, with more details to follow.
    • Provided instructions for the Q&A session and thanked participants for joining the call.

These statements provide an overview of the financial results, the strategic direction of the company, and the upcoming events and disclosures related to Microsoft Corporation.