Microsoft misses Q4 estimates with earnings of $0.55 per share on $23.38 billion in sales

MIcrosoft Earnings Q4 2014

Microsoft posted strong fiscal third-quarter earnings back in April, which helped carry the positive sentiment we’ve seen since Satya Nadella took over as CEO. Shares are now up about 12% over the past 12 months, having been given an extra boost when news leaked that Microsoft plans to eliminate 18,000 jobs, 12,500 of which will come from the Nokia devices and services business that Microsoft acquired recently.

Heading into Tuesday’s report, Wall Street was expecting Microsoft to post fiscal fourth-quarter earnings of $0.60 per share on revenue totalling $22.99 billion. The numbers are now in, and Microsoft missed estimates with a quarterly profit of $0.55 per share on $23.38 billion in sales. Operating income in the quarter was $6.48 billion.

For the same quarter last year, Microsoft reported earnings of $0.59 per share on $19.89 billion in revenue.

The company also noted phone revenue for the first time, which is sales from the Nokia cell phone unit. During the fiscal fourth quarter, phone revenue came in at $1.99 billion. Also of note, Nokia’s devices business ended up shaving a few cents off of Microsoft’s Q4 EPS, while analysts expected it to add some profit.

Microsoft’s full press release follows below.

Microsoft Cloud Growth Drives Strong Fourth-Quarter Results

Commercial cloud annualized revenue run rate now exceeds $4.4 billion.

REDMOND, Wash. — July 22, 2014 — Microsoft Corp. today announced revenue of $23.38 billion for the quarter ended June 30, 2014. Gross margin, operating income, and diluted earnings per share (“EPS”) for the quarter were $15.79 billion, $6.48 billion, and $0.55 per share, respectively.

Microsoft completed the acquisition of substantially all of the Nokia Devices and Services (“NDS”) business on April 25, 2014. Revenue and cost of revenue from the acquired business, including amortization of intangible assets, are reported in the new Phone Hardware segment. For the fourth quarter and fiscal year 2014, the results of NDS contributed revenue, gross margin, operating income, and diluted EPS of $1.99 billion, $54 million, $(692) million, and $(0.08), respectively.

“We are galvanized around our core as a productivity and platform company for the mobile-first and cloud-first world, and we are driving growth with disciplined decisions, bold innovation, and focused execution,” said Satya Nadella, chief executive officer of Microsoft. “I’m proud that our aggressive move to the cloud is paying off – our commercial cloud revenue doubled again this year to a $4.4 billion annual run rate.”

“Our solid execution and expense discipline allowed us to deliver a strong finish to the fiscal year,” said Amy Hood, executive vice president and chief financial officer at Microsoft. “As we enter fiscal 2015, we are focused on aligning our resources to strategic investments that we believe will deliver the next wave of innovation, growth, and long-term shareholder value.”

The following table reconciles these financial results reported in accordance with generally accepted accounting principles (“GAAP”) to Non-GAAP financial results. We have provided this Non-GAAP financial information to aid investors in better understanding the company’s performance. All growth comparisons relate to the corresponding period in the last fiscal year.

Three Months Ended June 30,
($ in millions, except per share amounts) Revenue Gross Margin Operating Income Diluted EPS
2013 As Reported (GAAP) $19,896 $14,294 $6,073 $0.59
Office Upgrade Offer $(782) $(782) $(782) $(0.07)
2013 As Adjusted (Non-GAAP) $19,114 $13,512 $5,291 $0.52
2014 As Reported (GAAP)¹ $23,382 $15,787 $6,482 $0.55
%Y/Y (GAAP) 18% 10% 7% (7)%
%Y/Y (Non-GAAP) 22% 17% 23% 6%

¹Fiscal year 2014 includes the results of the NDS business for the period beginning on April 25, 2014.

 

Additionally, we note below certain operational items that also impacted the company’s financial performance (“Noted Items”). Noted Items and the Non-GAAP measures are defined following the financial tables and highlights.

Three Months Ended June 30,
($ in millions, except per share amounts) Revenue Gross Margin Operating Income Diluted EPS
Surface RT Inventory Adjustments $(38) $(900) $(900) $(0.07)
2013 Impact of Noted Items $(38) $(900) $(900) $(0.07)
End of Nokia Commercial Agreement $382 $382 $382 $0.04
Integration and Restructuring - - $(127) $(0.02)
Adjustment to Prior Years’ Taxes - - - $(0.05)
2014 Impact of Noted Items $382 $382 $255 $(0.03)

 

Devices and Consumer revenue grew 42% to $10.00 billion, with the following business highlights:

  • Windows OEM revenue grew 3%, driven by 11% growth in Windows OEM Pro revenue.
  • Office 365 Home and Personal subscribers totaled more than 5.6 million, adding more than 1 million subscribers again this quarter.
  • The acquired Phone Hardware business contributed $1.99 billion to current year revenue.
  • Bing search advertising revenue grew 40%, and U.S. search share grew to 19.2%.

Commercial revenue grew 11% to $13.48 billion, with the following business highlights:

  • Commercial cloud revenue grew 147% with an annualized run rate that exceeds $4.4 billion.
  • Windows volume licensing revenue grew 11%.
  • Server products revenue, including Azure, grew 16%, with double-digit growth for SQL Server and System Center.

“Our results reflect our customers’ long-term commitments to our products and services, and strong execution by our field teams. We are thrilled with the tremendous momentum of our cloud offerings with Office 365 and Azure both growing over 100% again,” said Kevin Turner, chief operating officer at Microsoft. “Looking forward, we are excited by the amazing opportunities enabled by our technology roadmap and our strong engagement across partners, customers, and developers.”

For Microsoft’s fiscal year 2014, the company’s revenue, gross margin, operating income, and diluted EPS were $86.83 billion, $59.90 billion, $27.76 billion, and $2.63 per share, respectively.

The following table reconciles these financial results reported in accordance with GAAP to Non-GAAP financial results. We have provided this Non-GAAP financial information to aid investors in better understanding the company’s performance.

Twelve Months Ended June 30,
($ in millions, except per share amounts) Revenue Gross Margin Operating Income Diluted EPS
2013 As Reported (GAAP) $77,849 $57,600 $26,764 $2.58
Windows Upgrade Offer $(540) $(540) $(540) $(0.05)
European Commission Fine - - $733 $0.09
2013 As Adjusted (Non-GAAP) $77,309 $57,060 $26,957 $2.62
2014 As Reported (GAAP)1 $86,833 $59,899 $27,759 $2.63
%Y/Y (GAAP) 12% 4% 4% 2%
%Y/Y (Non-GAAP) 12% 5% 3% 0%

¹Fiscal year 2014 includes the results of the NDS business for the period beginning on April 25, 2014.

The impact of Noted Items on the financial results was the same for the fourth quarter and for fiscal year 2014.

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.

On July 17, 2014, Microsoft announced a restructuring plan to streamline and simplify its operations and align the recently acquired NDS business with the company’s overall strategy. The pre-tax costs associated with this plan are estimated to be between $1.1 billion and $1.6 billion and will be recorded in fiscal year 2015, substantially in the first half of the fiscal year.

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