Microsoft’s cloud unit boosts profits, phone revenue drops by 71% in Q4 FY 2016

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Microsoft today posted a $3.1bn (£2.4bn) profit for the three months to June. That was far better than the $3.2bn loss for the same period last year when Microsoft booked hefty charges on writing down the value of mobile phone assets it bought from Nokia.

Investors had not been expecting significant company-wide profit growth, but were looking for gains from the cloud computing division called Azure.

Microsoft announced the following results for the quarter ended June 30, 2016:

  • Revenue was $20.6 billion GAAP, and $22.6 billion non-GAAP
  • Operating income was $3.1 billion GAAP, and $6.2 billion non-GAAP
  • Net income was $3.1 billion GAAP, and $5.5 billion non-GAAP
  • Diluted earnings per share was $0.39 GAAP, and $0.69 non-GAAP/li>

Satya Nadella, chief executive officer at Microsoft said,

“This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations,”

“The Microsoft Cloud is seeing significant customer momentum and we’re well positioned to reach new opportunities in the year ahead.”

The following table reconciles the company’s financial results reported in accordance with generally accepted accounting principles (“GAAP”) to non-GAAP financial results. Microsoft has provided this non-GAAP financial information to aid investors in better understanding the company’s performance. Additional information regarding non-GAAP definitions is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.
[table style=”table-hover”]

Three Months Ended June 30,

 ($ in millions, except per share amounts)

Revenue

Operating Income (Loss)

Net Income (Loss)

Diluted Earnings (Loss) per Share

2015 As Reported (GAAP)

$22,180

$(2,053)

$(3,195)

$(0.40)

  Impairment, Integration, and Restructuring Expenses

8,438

8,262

1.02

2015 As Adjusted (non-GAAP)

$22,180

$6,385

$5,067

$0.62

2016 As Reported (GAAP)

$20,614

$3,080

$3,122

$0.39

  Net Impact from Windows 10 Revenue Deferrals

2,028

2,028

1,467

0.19

  Impairment, Integration, and Restructuring Expenses

1,110

895

0.11

2016 As Adjusted (non-GAAP)

$22,642

$6,218

$5,484

$0.69

Percentage Change Y/Y (GAAP)

(7)%

*

*

*

Percentage Change Y/Y (non-GAAP)

2%

(3)%

8%

11%

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

5%

6%

23%

27%

* Not meaningful

 

 

 

 

[/table]
During the quarter, Microsoft returned $6.4 billion to shareholders in the form of share repurchases and dividends.

The current quarter effective tax rate reflected a favorable mix of our income between the U.S. and foreign countries, as well as benefits associated with distributions from foreign affiliates. As such, the GAAP and non-GAAP tax rates were 7% and 15%, respectively.

“This fiscal year we invested in innovation and expanded our market presence in key product areas and geographies,” said Amy Hood, executive vice president and chief financial officer at Microsoft.

“I am pleased with the execution from our sales teams and partners this quarter who delivered a strong finish to the fiscal year.”

Revenue in Productivity and Business Processes grew 5% (up 8% in constant currency) to $7.0 billion, with the following business highlights:

  • 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 2.5x year-over-year

Revenue in Intelligent Cloud grew 7% (up 10% in constant currency) to $6.7 billion, with the following business highlights:

  • Server products and cloud services revenue increased 5% (up 8% in constant currency) driven by double-digit annuity revenue growth
  • Azure revenue grew 102% (up 108% in constant currency) with Azure compute usage more than doubling year-over-year
  • Enterprise Mobility customers nearly doubled year-over-year to over 33,000, and the installed base grew nearly 2.5x year-over-year

Revenue in More Personal Computing declined 4% (down 2% in constant currency) to $8.9 billion, with the following business highlights:

  • Windows OEM non-Pro revenue grew 27% (up 27% in constant currency), outpacing the consumer PC market, and 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
  • Phone revenue declined 71% (down 70% in constant currency)
  • Xbox Live monthly active users grew 33% year-over-year to 49 million
  • Search advertising revenue excluding traffic acquisition costs grew 16% (up 17% in constant currency) with continued benefit from Windows 10 usage

Fiscal Year 2016 Results

Microsoft today announced the following results for the fiscal year ended June 30, 2016:

  • Revenue was $85.3 billion GAAP, and $92.0 billion non-GAAP
  • Operating income was $20.2 billion GAAP, and $27.9 billion non-GAAP
  • Net income was $16.8 billion GAAP, and $22.3 billion non-GAAP
  • Diluted earnings per share was $2.10 GAAP, and $2.79 non-GAAP

The following table reconciles the company’s financial results reported in accordance with GAAP to non-GAAP financial results.
[table style=”table-hover”]


 

Twelve Months Ended June 30,

 ($ in millions, except per share amounts)

Revenue

Operating Income

Net Income

Diluted Earnings per Share

2015 As Reported (GAAP)

$93,580

$18,161

$12,193

$1.48

  Impairment, Integration, and Restructuring Expenses

10,011

9,494

$1.15

2015 As Adjusted (non-GAAP)

$93,580

$28,172

$21,687

$2.63

2016 As Reported (GAAP)

$85,320

$20,182

$16,798

$2.10

  Net Impact from Windows 10 Revenue Deferrals

6,643

6,643

4,635

0.58

  Impairment, Integration, and Restructuring Expenses

1,110

895

0.11

2016 As Adjusted (non-GAAP)

$91,963

$27,935

$22,328

$2.79

Percentage Change Y/Y (GAAP)

(9)%

11%

38%

42%

Percentage Change Y/Y (non-GAAP)

(2)%

(1)%

3%

6%

[/table]
The current year GAAP and non-GAAP effective tax rates were 15% and 19%, respectively.

Microsoft presents constant currency information to provide a non-GAAP framework for assessing how the underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period non-GAAP 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. The non-GAAP financial measures presented below should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. All growth comparisons relate to the corresponding period in the last fiscal year.

Financial Performance Constant Currency Reconciliation
[table style=”table-hover”]

 

Three Months Ended June 30,

 ($ in millions, except per share amounts)

Revenue

Operating Income (Loss)

Net Income (Loss)

Diluted Earnings (Loss) per Share

2015 As Reported (GAAP)

$22,180

$(2,053)

$(3,195)

$(0.40)

2015 As Adjusted (non-GAAP)

$22,180

$6,385

$5,067

$0.62

2016 As Reported (GAAP)

$20,614

$3,080

$3,122

$0.39

2016 As Adjusted (non-GAAP)

$22,642

$6,218

$5,484

$0.69

Percentage Change Y/Y (GAAP)

(7)%

*

*

*

Percentage Change Y/Y (non-GAAP)

2%

(3)%

8%

11%

Constant Currency Impact

$(596)

$(575)

$(764)

$(0.10)

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

5%

6%

23%

27%

* Not meaningful

 

 

 

 

[/table]
Segment Revenue Constant Currency Reconciliation
[table style=”table-hover”]

 

Three Months Ended June 30,

 ($ in millions)

Productivity and Business Processes

Intelligent Cloud

More Personal Computing

2015 As Reported (GAAP)

$6,661

$6,296

$9,243

2016 As Reported (GAAP)

$6,969

$6,711

$8,897

Percentage Change Y/Y (GAAP)

5%

7%

(4)%

Constant Currency Impact

$(249)

$(215)

$(133)

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

8%

10%

(2)%

[/table]
Selected Product Revenue Constant Currency Reconciliation
[table style=”table-hover”]

 

Three Months Ended June 30,

Percentage Change Y/Y (GAAP)

Constant Currency Impact

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

Office commercial products and cloud services

5%

4%

9%

Office 365 commercial

54%

5%

59%

Office consumer products and cloud services

19%

(1)%

18%

Dynamics products and cloud services

6%

1%

7%

Server products and cloud services

5%

3%

8%

Azure

102%

6%

108%

Windows OEM non-Pro

27%

0%

27%

Windows OEM Pro

2%

0%

2%

Surface

9%

0%

9%

Phone

(71)%

1%

(70%)

Search advertising excluding traffic acquisition costs

16%

1%

17%

[/table]
Reconciliation of GAAP and Non-GAAP Effective Tax Rates

The following table provides a reconciliation of the GAAP and non-GAAP effective tax rates for the current quarter and current year:
[table style=”table-hover”]

 

Effective Tax Rate

Three Months Ended June 30,

Twelve Months Ended June 30,

2016 As Reported (GAAP)

7%

15%

  Net Impact from Windows 10 Revenue Deferrals

5%

4%

  Impairment, Integration, and Restructuring Expenses

3%

0%

2016 As Adjusted (non-GAAP)

15%

19%

[/table]
Commercial Cloud Annualized Revenue Run Rate

Commercial cloud annualized revenue run rate is calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics Online, and other cloud properties.

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