Microsoft delivered record first quarter
revenue. This holiday, the company will see competitive opening price points on
tablets and laptops, such as the Dell Inspiron 15 for less than $300 and will
also see exciting mobile devices from six inch phones to 10 inch tablets, many
with Microsoft Office.
In the six inch category, Microsoft is incredibly
excited by the Nokia Lumia 1520 tablet announced this past Tuesday. For eight
inch tablets, Toshiba, Dell, Lenovo will have devices available for less than
$300 and for 10 inch tablets; the company of course likes the Nokia Lumia 2520
with LTE.
Total revenue was up 7% to $18.6 billion
and came in at about $700 million better than the company’s expectations.
Without the impact of foreign exchange, revenue would have been $200 million or
one percentage point better.
Annuity revenue was particularly strong
and grew 11%, driven by commercial performance. Cost of goods sold increased
23%, which was in line with the company’s expectation of over 20% growth. This
increase was primarily due to service cost and also higher depreciation related
to the CapEx investments Microsoft made this quarter for cloud services
strategy. As a result, gross margin grew 3% to $13.5 billion, reflecting the
changing mix of revenue.
In R&D, Microsoft is continuing to
focus its resources while accelerating cadence. Operating income and earnings
per share, both declined 3% to $6.4 billion and $0.63, respectively. Unearned
revenue grew a healthy 14% to $20.1 billion and the company’s contracted not
billed balance grew to over $21 billion, driven by commercial strength.
Microsoft’s
inventory balance sequentially increased by $675 million, mostly due to build
the Xbox 360 and Xbox One. Ahead of holiday selling season, Xbox represents
over half of the company’s inventory balance.
Inventory for Surface products declined
sequentially even as the company built levels ahead of this week Surface 2 and
Surface Pro 2 launches. This quarter, Microsoft announced a 22% increase in its
quarterly dividend to 28% and also announced $40 billion share repurchase
program. The company returned $3.8 billion of cash to shareholders, high
quarterly amount since the second quarter of fiscal 2011.
Performance
of each Reporting Segments:
Microsoft’s devices and consumer
licensing segment is comprised principally of Windows OEM, consumer office and
Windows Phone, including related patent licensing. Windows OEM business
performed better than expected, declining 7% versus the company’s expectation
of a mid-teens decline.
The management believes it is seeing
stabilization in business PCs, which grew again this quarter and drove Pro
revenue growth of 6%. The company also saw better than expected performance in
the consumer part of business.
Non-Pro revenue declined 22%, but with
several points better than expected. Excluding the impact of China, which
continues to have a different dynamics than other emerging markets, non-Pro
revenue declined 17%.
Moving to Devices and Consumer other. As
a reminder, this segment includes the online marketplaces, advertising, Xbox
Studio, Office 365 Home Premium and other consumer products and services. This
quarter revenue growth in this segment was driven by both an increase in
advertising revenue and also volumes in online marketplaces.
Search advertising revenue grew 47%
driven by continued revenue per search improvements and query volume growth.
Bing has now grown its share of search queries in the U.S. to 18%. Gross margin
declined slightly due to higher royalty costs and also infrastructure cost
growth as the company expanded geographic footprint of its services.
Moving to Commercial Business. With all
up commercial revenue across both on-premise and cloud services grew 10% this
quarter. Notably even as the company invests for growth, it saw gross margin
expansion in commercial cloud business.
Across commercial portfolio, the
company saw healthy renewal, a continued shift to premium products and strong
adoption of its cloud services. Microsoft’s enterprise cloud strategy is
resonating with customers and server product revenue grew 12%. SQL Server
revenue grew double-digit with SQL Server Premium revenue growing over 30%.
Office products also remained strong and
grew 11%. Within this, SharePoint, Exchange and Lync collectively grew
double-digits with Lync growing nearly 30%. Helping to drive this demand for Server
and Office product is deployment of hybrid cloud solution. This quarter,
revenue for the company’s commercial cloud services grew over 100% as services
such as Office 365, innovative Azure services for comprehensive cloud solution.
Revenue in the Commercial Licensing
segment grew 7% and in Commercial Other segment, revenue grew 28% to $1.6
billion. As a reminder, Corporate and Other is where Microsoft consolidates
adjustments for tech guarantees, pre-sales and the like. In the comparable
quarter of last year, the company had aggregate deferrals of $1.4 billion for
Windows and Office and this quarter deferred $113 million, primarily related to
Windows 8.1 pre-sale.
Future
Outlook
Devices
and Consumer
In Licensing, Microsoft expects revenue
to be $5.2 billion to $5.4 billion. This range reflects similar dynamics to
what the company saw in the first quarter. As noted earlier, the company expects
the business PC market to be stable; however, the consumer PC market is subject
to more volatility.
In Hardware, the company expects revenue
to grow 35% to 45% to $3.8 billion to $4.1 billion, reflecting the expanded
Surface line up and the much anticipated Xbox One launch. The 10 percentage
point range reflects variability in device unit volumes. In the consumer
hardware business, such variability is not uncommon, especially during launches
and the holiday season.
In Devices and Consumer Other, the
company expects revenue to be $1.7 billion to $1.8 billion. Search revenue
should continue to grow reflecting improved revenue per search and query
volume. As a reminder, in Q2 of the prior year, Microsoft launched Halo 4,
which contributed $380 million of revenue to this segment.
Commercial
The company expects revenue to grow 9%
to 11%, in line with the first quarter.
In Commercial Licensing, Microsoft expects
revenue to be $10.7 billion to $10.9 billion, with similar dynamics to what it saw
in the first quarter. This includes healthy renewals and strong annuity revenue
growth from volume licensing with Software Assurance.
In Commercial Other, the company expects
revenue to be $1.7 billion to $1.9 billion, reflecting ongoing momentum in its commercial
cloud business and enterprise services. As CIOs increasingly look to capitalize
on the opportunities of cloud computing, the management is confident they will
continue to look to Microsoft for their IT solutions.
Cost
of Revenue
Moving on to cost of revenue, the
company expects it to be $7.9 billion to $8.3 billion next quarter. This range
primarily relates to the unit variability assumed in hardware revenue.
Operating
Expenses
Microsoft expects OpEx to grow 6% to 8%,
to $8.5 billion to $8.6 billion. The company also reaffirms its full-year
guidance of $31.3 billion to $31.9 billion. The company continues to invest in
innovative experiences for its customers while remaining focused on expenses.
Microsoft still expects full year
capital expenditures to be about $6.5 billion, even though the company only
spent $1.2 billion in the first quarter. Given the nature of the investments,
there is variability from quarter-to-quarter due to company’s success based
approach as well as the timing of delivery and completion.
The company expects its tax rate for the
full year to be between 18% and 20%, depending on its geographical mix of
earnings. When adjusting for tech guarantees and product deferrals, Microsoft expects
unearned revenue to be roughly in line with historical trends.
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