Today Microsoft released their earnings from the first quarter of fiscal year 2016. Revenue fell 12% year-over-year to $20.4 billion for the quarter, driven by a 17% decline in revenue from their More Personal Computing segment. Operating income for the quarter was $5.8 billion, with gross margin at 64.6%. Despite the revenue decline, net income rose 2% to $4.6 billion, with earnings per share beating expectations at $0.57.

Microsoft Q1 2016 Financial Results (GAAP)
  Q1'2016 Q4'2015 Q1'2015
Revenue (in Billions USD) $20.379 $22.180 $23.201
Operating Income (in Billions USD) $5.793 -$2.053 $5.844
Gross Margin (in Billions USD) $14.712 $14.712 $14.928
Margins 64.6% 66.3% 64.3%
Net Income (in Billions USD) $4.620 -$3.195 $4.540
Basic Earnings per Share (in USD) $0.57 -$0.40 $0.55

Microsoft is also offering Non-GAAP results which take into consideration the strong US dollar, which has affected their revenue. Based on constant currency, revenue declined just 2% to $21.7 billion, with operating income up 11% to $7.1 billion. Net income was also up 11% to $5.4 billion, and earnings per share rose 15% to $0.67.

Microsoft Q1 2016 Financial Results (Non-GAAP)
  Q1'2016 Q1'2015
Revenue (in Billions USD) $21.660 $23.201
Operating Income (in Billions USD) $7.074 $6.984
Net Income (in Billions USD) $5.380 $5.449
Basic Earnings per Share (in USD) $0.67 $0.65

Microsoft has done a reorganization of their business lines, and while I don’t love the new naming scheme, the groupings make a lot more sense. No longer does an Office 365 subscriber pull away sales from traditional Office, since they now fall under the “Productivity and Business Processes” group, which also tracks Dynamics CRM software. “Intelligent Cloud” covers Windows Server products as well as Azure, and “More Personal Computing” is Windows, Surface, phones, Xbox, and search. Previously the segments fell under consumer and commercial with sub-categories as well. Check out their last quarter if you would like to see the changes.

More Personal Computing had the biggest hit this quarter, down 17% year-over-year. Revenue came in at $9.38 billion for this segment, and operating income dropped 4% to $1.56 billion. A big chunk of this was a drop in devices revenue, down 45% using constant currency (CC) values, with a primary part of this being a 54% CC drop in phone revenue to $1.1 billion. Surface revenue also declined from $908 million in Q1 2015 to $672 million in Q1 2016. Microsoft attributes this to the lifecycle of the Surface Pro 3, which first launched in June 2014 and that makes sense since the Surface Pro 4 was just released. Windows OEM sales declined 7% for Pro, which was slightly better than the decline in the business PC sector itself, and Windows OEM non-Pro declined 4%, which actually outperformed the consumer PC market. Volume licensing sales for Windows grew 4% CC. Gaming revenue grew 6% CC, and Xbox Live gained 9 million active users year-over-year to 39 million, which is up 2 million from last quarter. Xbox hardware revenue was down primarily due to a lower number of Xbox 360 sales. Search showed good signs of growth, with nearly 20% of search revenue in September being from Windows 10 devices.

Productivity and Business Processes had revenues of $6.31 billion, down 3% year-over-year, but with constant currency values, it grew 4%. Operating income for the segment was $3.11 billion, down 7% year-over-year. Office was strong though, with a 5% CC growth in commercial and cloud Office services. Office 365 continues to gain traction, with revenues up almost 70%, and it the number of seats increased 66%. Traditional Office commercial software declined 8% year-over-year. On the consumer side, Office revenue fell 4% CC, and Office 365 subscription revenue more than offset the loss of revenue from traditional Office sales. Microsoft now has 18.2 million subscribers for Office 365 Home/Personal, which is growth of about 3 million since last quarter. Dynamics products and cloud services grew 12% CC.

The final segment is Intelligent Cloud, and Microsoft continues to see strong growth in their cloud offerings. Revenue was up 8% to $5.89 billion, which would be a 14% growth with constant currency. Operating income was $2.4 billion, up 14%. Microsoft saw strong grown in Azure and premium server products which was offset by exchange rates with foreign currency. Cloud platform offerings had gains of 13% CC, and Windows Server products grew 9% CC from double digit growth in premium versions of Windows Server, System Center, and SQL. Azure revenue was up 135% CC, and Microsoft doubled their Enterprise Mobility customers. Enterprise Services grew 16% CC primarily by growth in Premier Support Services.

Microsoft Q1 2016 Financial Results (GAAP)
  Productivity and Business Processes Intelligent Cloud More Personal Computing
Revenue (in Billions USD) $6.31 $5.89 $9.38
Operating Income (in Billions USD) $3.11 $2.40 $1.56
Revenue Change YoY -3%, +4% CC +8%, +14% CC -17%, -13% CC
Operating Income Change YoY -7% +14% -4%

With a decline in the PC market, and the Windows 10 upgrade program, it’s not too surprising to see a dip in revenues in that market. We won’t really have numbers for the latest Surface Pro 4 and Surface Book on the Surface lineup until really Q3, since the Q2 values will be skewed by the release timeline, but we’ll have to watch and see if sales can improve like they did over the Surface Pro 3’s lifetime. The cloud has always been a strength of Microsoft, with them being the only company to offer the same products as either hosted solutions or on-premises solutions for many of their business products such as SQL, Exchange, and System Center.

What we are seeing right now is Microsoft in transition. Revenues from Windows 10 are being deferred over longer timeframes, and they have been moving to subscription models for many of their popular products. Only a few years ago, the idea of a subscription version of Office would have seemed like suicide, but the move to Office 365 has been strong so far.

Microsoft is in the midst of revamping its consumer lineup of hardware as well, so the new Surface Pro 4, Surface Book Band 2, and Lumia phones should start to factor in next quarter. I look forward to seeing how well they do in the market.

Source: Microsoft




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  • kspirit - Friday, October 23, 2015 - link

    How does tax factor into this? Reply
  • RBFL - Friday, October 23, 2015 - link

    Probably so the accounts department don't have a lousy December/Christmas.

    The UK Tax year, for example, is April-April.
  • steven75 - Friday, October 23, 2015 - link

    We use OneDrive for Business at work on Win7 and the sync client is a complete joke of a product. Completely inferior in every way to basically every other similar service. I cannot imagine *personally* paying for that crap. Our IT says "Microsoft promises a new release in X months that fixes some of these issue." LOL! Reply
  • superflex - Friday, October 23, 2015 - link

    I'll get an email that a document has been saved and I get the privilege of waiting up to a half hour before it shows up on the server.
    Thanks M$ Cloud.
  • jamyryals - Friday, October 23, 2015 - link

    I had both OneDrive and OneDrive for business on my work computer, and I switched over to the consumer one because of the problems with the business client. Consumer OneDrive was much closer to dropbox/googledrive. The only thing I missed from dropbox was context menu sharing. In Windows 10, that has been added so I'm happy with the consumer OneDrive now.

    I know not everyone can run the software they want on work machines though... so Microsoft really needs to close the gaps in those products.
  • SpartyOn - Friday, October 23, 2015 - link

    I too use both OneDrive consumer (at home) and OneDrive for Business (at work). The consumer version I've never had a problem with and it "just works" - something to the tune of 3TB backed up and synced on my personal OneDrive.

    OneDrive for Business though has been a terrible failure for our small business, mostly due to the fact its platform is based on the old SharePoint Online from 2008. #1: the 20,000 library sync limit is asinine and unusable in a business setting where you don't usually have a small number of big files, but rather many numerous small-sized files; #2: the work around to this, of having to create separate SharePoint Team Sites, doesn't really work because those impose their own 5,000 file sync limit; #3: the desktop sync client is abysmal and often times drops out of sync, can take a long time uploading small files (think days), fails to repair itself properly after an issue, and has extremely SLOW responsiveness.

    The good news though! Microsoft has listened to our business' bitching, along with numerous others (especially on why the consumer OneDrive is so good, but the Business version is so poor! So, so, so very stupid - you make much more on enterprise solutions!) and they're new sync client and platform is scheduled to rollout by the end of the year. It's already in beta testing.

    I've been following these extremely important and needed updates since their announcement at the MS Ignite conference in May and it looks like we're finally getting close. These changes should make OneDrive for Business now a productivity tool instead of a weekly aggravation!

    More info:
  • andrewaggb - Friday, October 23, 2015 - link

    Yeah I bought office 365 for home mostly for the one one-drive storage. Pictures/files etc. OneDrive is kinda slow and flaky sometimes... I personally found dropbox works better, but the price is pretty good and it includes office for 5 computers (wife and 3 kids). It's pretty good.

    At work we use and sell office 365, but again I'm pretty happy with it. It could be better, but I think it completely outclasses what you'd get from google or anyone else.

    Azure is pretty feature rich... and pricey ... and kinda slow. They have some new VM types that are faster, but yeah. There's lots of cheaper options, so for personal use I wouldn't recommend azure, but corporate use is entirely different. You just really can't compare the azure management interface and features to anybody else except amazon and they have similar pricing.

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