01—Abstract
Summary
Summary of the 10-K filed August 3, 2018. Cited figures are marked; the original filing is the authoritative source.
Microsoft's fiscal 2018 10-K (year ended June 30, 2018) shows a business that grew revenue 14% to $110.4 billiona and operating income 21% to $35.1 billion, with growth across all three segments.
The headline GAAP net income decline to $16.6 billionb (down 35%, diluted EPS $2.13) is driven by a one-time $13.7 billion net charge from the Tax Cuts and Jobs Act. Excluding that charge and prior-year restructuring, adjusted net income rose 18% to $30.3 billion and adjusted diluted EPS rose 18% to $3.88. Investors should treat the adjusted figures as the better read on underlying operating momentum, while recognizing that the TCJA estimate is provisional and could still move.
Growth was led by the cloud. Commercial cloud revenue rose 56% to $23.2 billionc, Azure grew 91%, and Office 365 commercial grew 41%. Intelligent Cloud gross margin improved by about 7 percentage points in commercial cloud, though management warned that heavy infrastructure and cloud engineering investment will continue to pressure operating margins.
LinkedIn contributed $5.3 billiond in revenue but still posted an operating loss of $987 million, including $1.5 billion of intangible amortization, which highlights the cost of its acquisition. Balance sheet and cash flow remain strong. Cash, equivalents, and short-term investments were $133.8 billion against $76.2 billion of long-term debt, and operating cash flow reached $43.9 billion.
Capital returned to shareholders included $12.7 billion in dividends and $8.6 billion in buybacks. The company also has a $17.6 billion transition tax payable over eight years and a pending $7.5 billion all-stock acquisition of GitHub, which is expected to close by calendar year-end 2018.
02—Key points
Key Highlights
- Revenue grew 14% to $110.4 billion, and operating income grew 21% to $35.1 billion, with all three segments contributing to growth.
- GAAP net income fell 35% to $16.6 billion (diluted EPS $2.13) because of a $13.7 billion net TCJA charge; adjusted diluted EPS rose 18% to $3.88.
- Commercial cloud revenue increased 56% to $23.2 billion; Azure revenue grew 91% and Office 365 commercial grew 41%.
- Productivity and Business Processes revenue rose 20% to $35.9 billion, boosted by a full year of LinkedIn ($5.3 billion revenue, up from $2.3 billion), which still posted a $987 million operating loss.
- Gaming revenue rose 14%, Xbox software and services grew 20%, and Surface revenue rose 16%, while Phone revenue continued to decline.
- Balance sheet strength: $133.8 billion in cash and short-term investments versus $76.2 billion of long-term debt; operating cash flow was $43.9 billion.
- Shareholder returns totaled roughly $21.3 billion in FY2018 ($12.7 billion in dividends and $8.6 billion in buybacks), with $28.2 billion of buyback authorization remaining.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Microsoft Corp kept $0.15.
- Revenue$110.36B100.0%
- Cost of revenue−$38.35B34.8%
- Gross profit$72.01B65.2%
- Operating costs−$36.95B33.5%
- Operating income$35.06B31.8%
- Interest, other & tax−$18.49B16.8%
- Net income$16.57B15.0%
Where FY2018 revenue went
$110.36B- Cost of revenue: $38.35B, 35% of revenue
- Other operating costs: $22.22B, 20% of revenue
- Interest, other & tax: $18.49B, 17% of revenue
- Net income: $16.57B, 15% of revenue
- R&D: $14.73B, 13% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed August 3, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $110.36B$96.57B | +14.3% |
| Cost of Revenue | $38.35B$34.26B | +11.9% |
| Gross Profit | $72.01B$62.31B | +15.6% |
| R&D Expenses | $14.73B$13.04B | +13.0% |
| Operating Income | $35.06B$29.02B | +20.8% |
| Interest Expense | $2.73B$2.22B | +23.0% |
| Net Income | $16.57B$25.49B | −35.0% |
| EPS (Basic) | $2.15$3.29 | −34.7% |
| EPS (Diluted) | $2.13$3.25 | −34.5% |
| Shares Outstanding (Basic) | 7.70B7.75B | −0.6% |
| Shares Outstanding (Diluted) | 7.79B7.83B | −0.5% |
05—Questions
Frequently Asked Questions
Why did GAAP net income fall 35% if operations grew so strongly?
The decline is driven almost entirely by a one-time $13.7 billion net charge related to the Tax Cuts and Jobs Act, which reduced diluted EPS by $1.75. Excluding this charge and prior-year restructuring costs, adjusted net income increased 18% to $30.3 billion. The TCJA amount is a provisional estimate that may be revised as the company completes its accounting within one year of enactment.
How significant is the cloud business to Microsoft's growth?
Very significant. Commercial cloud revenue reached $23.2 billion, up 56%, and Azure grew 91%. Management noted that cloud growth also improved commercial cloud gross margin by about 7 percentage points, mainly from Azure. However, the company stated that continued investment in datacenters and cloud engineering will increase operating costs and may reduce operating margins over time.
Is the LinkedIn acquisition paying off?
LinkedIn revenue more than doubled to $5.3 billion, but it remains unprofitable on a GAAP basis, with a fiscal 2018 operating loss of $987 million that includes $1.5 billion of amortization of acquired intangibles. The filing indicates that management expects the acquisition to accelerate growth in LinkedIn, Office 365, and Dynamics 365, but returns are not yet reflected in reported profit.
What are the key financial obligations and risks ahead?
The company has a remaining transition tax of $17.6 billion payable interest-free over eight years, about $76.9 billion in long-term debt principal, and $19.3 billion in next-year purchase commitments. Pending items include the $7.5 billion all-stock GitHub acquisition, expected to close by the end of calendar 2018. Risk factors highlight intense competition, cybersecurity threats, GDPR compliance costs, and ongoing antitrust scrutiny in the EU, the U.S., and China.
06—Continue