01—Abstract
Summary
Summary of the 10-K filed August 2, 2017. Cited figures are marked; the original filing is the authoritative source.
Microsoft's fiscal 2017 10-K (year ended June 30, 2017) shows a company in transition: revenue rose 5% to $89.95 billiona and operating income rose 11% to $22.3 billion, while diluted EPS climbed 29% to $2.71.
Growth was led by the cloud and the LinkedIn acquisition (completed December 2016 for $27.0 billionb). Commercial cloud annualized revenue run rate exceeded $18.9 billion, Azure revenue grew 99%, and Office 365 commercial revenue grew 46%. Results were also flattered by a sharp reduction in phone-business charges compared with prior years, and the effective tax rate fell to 8% from 15%, partly due to realized tax benefits from earlier phone losses.
Reported results are depressed by a $6.7 billionc net deferral of Windows 10 revenue, which the company expects to reverse under the new revenue standard adopted July 1, 2017. Balance sheet and cash flow highlights include $133.0 billion in cash and short-term investments, but also total long-term debt of $77.8 billion principal (up from $40.9 billion) after debt issuances used partly to fund acquisitions. Operating cash flow reached $39.5 billion, and free cash flow (operating cash flow less capex of $8.1 billion) was roughly $31.4 billion.
Shareholder returns included $11.8 billiond in dividends paid and $10.3 billion in share repurchases, with $36.8 billion remaining under the current authorization. Management also disclosed that $127.9 billion of cash is held by foreign subsidiaries, a repatriation-related issue for investors to watch. Key risks flagged in the filing include intense competition across platforms and business models, the margin pressure from investing in cloud infrastructure, regulatory scrutiny (including EU competition matters, the GDPR taking effect May 2018, and an ongoing FCPA-related inquiry), an unresolved IRS transfer-pricing audit, and the planned reorganization of the global sales force announced in July 2017, which could disrupt revenue in the near term.
02—Key points
Key Highlights
- Revenue grew 5% to $89.95B; gross margin rose 6% to $55.7B, with LinkedIn and commercial cloud as key drivers
- Commercial cloud annualized revenue run rate exceeded $18.9B; Azure revenue grew 99% and Office 365 commercial grew 46%
- Operating income rose 11% to $22.3B; diluted EPS rose 29% to $2.71, aided by lower phone-related impairment and restructuring charges
- Reported results absorb a $6.7B net Windows 10 revenue deferral; the new revenue standard (adopted July 1, 2017) is expected to add about $6.6B to FY2017 revenue on a pro forma basis
- Effective tax rate fell to 8% (from 15%), partly from phone-business loss benefits; a $13.5B tax contingency liability and an open IRS transfer-pricing audit remain
- Operating cash flow of $39.5B and free cash flow of roughly $31B; $11.8B dividends and $10.3B buybacks returned to shareholders
- Total long-term debt rose to $77.8B in principal from $40.9B, while $127.9B of cash sits in foreign subsidiaries, creating repatriation tax considerations
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Microsoft Corp kept $0.26.
- Revenue$96.57B100.0%
- Cost of revenue−$34.26B35.5%
- Gross profit$62.31B64.5%
- Operating costs−$33.28B34.5%
- Operating income$29.02B30.1%
- Interest, other & tax−$3.54B3.7%
- Net income$25.49B26.4%
Where FY2017 revenue went
$96.57B- Cost of revenue: $34.26B, 35% of revenue
- Net income: $25.49B, 26% of revenue
- Other operating costs: $20.25B, 21% of revenue
- R&D: $13.04B, 13% of revenue
- Interest, other & tax: $3.54B, 3.7% of revenue
Kept 26% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed August 2, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $96.57B$91.15B | +5.9% |
| Cost of Revenue | $34.26B$32.78B | +4.5% |
| Gross Profit | $62.31B$58.37B | +6.7% |
| R&D Expenses | $13.04B$11.99B | +8.8% |
| Operating Income | $29.02B$26.08B | +11.3% |
| Interest Expense | $2.22B$1.24B | +78.8% |
| Net Income | $25.49B$20.54B | +24.1% |
| EPS (Basic) | $3.29$2.59 | +27.0% |
| EPS (Diluted) | $3.25$2.56 | +27.0% |
| Shares Outstanding (Basic) | 7.75B7.92B | −2.3% |
| Shares Outstanding (Diluted) | 7.83B8.01B | −2.3% |
05—Questions
Frequently Asked Questions
How much did the LinkedIn acquisition contribute to fiscal 2017 results?
LinkedIn contributed $2.3 billion of revenue and an operating loss of $948 million in fiscal 2017, including $866 million of intangible amortization. Management says the acquisition is intended to accelerate growth in Office 365, Dynamics 365, and LinkedIn itself, but the near-term effect on operating margins is negative.
Why do reported results understate underlying growth?
Under the old accounting policy, Windows 10 license revenue was recognized ratably over the device life, which deferred $6.7 billion of revenue in fiscal 2017 (and $6.6 billion in fiscal 2016). Under the new standard adopted July 1, 2017, much of this revenue is recognized at billing and delivery, so FY2017 revenue would be about $6.6 billion higher on a pro forma basis, and reported growth would look stronger going forward.
What are the main risks investors should monitor?
Key risks include competition from platforms and business models that are free or advertising-funded, margin pressure from cloud infrastructure spending, regulatory exposure (EU competition obligations, GDPR penalties of up to 4% of worldwide revenue, and an antitrust inquiry in China), data security and breach liability, the July 2017 global sales reorganization, and an unresolved IRS transfer-pricing audit that could significantly affect taxes.
How strong is Microsoft's balance sheet and liquidity position?
The company held $133.0 billion of cash and short-term investments and has a AAA long-term unsecured debt rating. Total debt has risen to about $77.8 billion principal after large 2016-2017 bond issuances, and about $127.9 billion of cash is held offshore. Management says domestic liquidity is sufficient for at least 12 months without repatriation, though borrowing or repatriation could raise effective tax rates or interest costs if U.S. capital needs grow.
06—Continue