Friday, January 27th 2017

Microsoft Announces Q2 2017 (Fiscal Year) Results - Beating Expectations

This afternoon, Microsoft had its earnings announcement for the second quarter of their 2017 fiscal year, beating Wall Street expectations with revenue of $26.1 billion (beating estimates of $25.3 billion), net income of $6.5 billion, and earnings per share of $0.83 (predicted at $0.79).

Microsoft has shuffled their product groups around a bit for reporting, and they now have three groups: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. LinkedIn results, when aggregated to Microsoft's subsequent earnings reports (which have been included separately due to the acquisition having been completed on December 8th 2016), will fall in the first group.
"Productivity and Business Processes" is a big part of Microsoft and a high margin business, featuring Office commercial and cloud products, Office 365 commercial and consumer, as well as Dynamics and, now, LinkedIn. This segment presented revenues of $7.38 billion, up 10%, and an operating income of $3.26 billion for the quarter, down 1% year-over-year (YOY). Microsoft gained 37% more Office 365 commercial seats this quarter, and 900,000 more Office 365 consumer subscribers. Dynamics is another key area of this group, presenting a 7% growth year-over-year, with Dynamics 365 growing over 200% year-over-year as people switch to the cloud version of Dynamics.

"Intelligent Cloud" encompasses Microsoft's server products, featuring revenues of $6.86 billion, up 8% YOY. Operating income for this segment was $2.4 billion, down 7% YOY. Server products and cloud services saw revenue grow 12% year-over-year, but enterprise services fell 4%, whilst Microsoft's all-powerful and prodigal child Azure revenue being up 93% compared to the same time last year, accompanied by an almost doubling on the service's usage. The company said its commercial cloud annual run rate - calculated by multiplying cloud property revenue from the last month of the quarter by 12 - now exceeds $14 billion.
"More Personal Computing" continued to have the highest revenue per segment, at $11.82 billion, falling 5% compared to the same time last year. Margins are also not as high in this segment, with an operating income of $2.5 billion for the quarter, though Microsoft has seen steady growth (meaning extra possible revenue streams from Microsoft's other areas and services). Windows OEM Pro revenue was up 6%, with non-Pro increasing 5%. Windows commercial products and cloud services had revenue gains of 5%. Surface revenue was down 2%, being almost flat year-over-year, which isn't all that bad when one considers that the Surface Pro 4 and the Surface Book have launched more than a year ago with no refresh having taken place. Surface had revenue of $1.3 billion for the quarter.
Gaming revenue on this segment for the quarter was down 3%, to $3.595 billion, with Microsoft attributing lower console pricing and lower console sales as responsible to the decline. Microsoft has found strong growth in their digital ecosystem though, with Xbox software and services growing revenue by 18%, and for the first time, digital transactions reached $1 billion for the quarter. Xbox Live active users grew 15% to 55 million as well, across all of Microsoft's platforms. Search revenue was also up 10%.
The big hit to More Personal Computing continues to be the loss in revenue from the phone division, which was shuttered. Phone revenue was down 81% as Microsoft phases out of this market, at least until their much vaunted and much secretive "Surface Phone" launches. Though I would have to say that that solution will probably be a premium offering, much like Windows does with its Surface and Surface Book product lines (and most recently the studio), positioning it as a premium, high-margin product more than a whole new assault on the mobile market.

Despite the strong numbers, Microsoft shares remained flat in after-hours trading. During the company's earnings call, CEO Satya Nadella said Microsoft was focusing on deep learning and AI, adding that "the 18 billion questions users have asked Cortana created a strong base for machine learning". AI uprising anyone?
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