10-QPeriod: Q2 FY2020

MICROSOFT CORP Quarterly Report for Q2 Ended Dec 31, 2019

Filed January 29, 2020For Securities:MSFT

Summary

Microsoft Corporation's (MSFT) fiscal second quarter 2020 results, ending December 31, 2019, demonstrate robust top-line growth and improved profitability. Total revenue increased by 14% year-over-year to $36.9 billion, driven by strong performance across all three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The company's strategic focus on cloud services continues to pay off, with commercial cloud revenue surging by 39% to $12.5 billion, largely propelled by a significant 62% increase in Azure revenue. This growth in high-margin cloud offerings contributed to a substantial 22% increase in gross margin and a 35% rise in operating income to $13.9 billion. Diluted earnings per share also saw a healthy increase of 40% to $1.51. Key financial highlights include continued strength in Office Commercial (up 16%), LinkedIn (up 24%), and Windows OEM licensing (up 18%). While the Gaming segment experienced a decline, the overall financial performance reflects Microsoft's successful execution of its cloud-first strategy and its ability to drive growth in its core and emerging businesses. The company maintains a strong liquidity position with $134.3 billion in cash, cash equivalents, and short-term investments.

Financial Highlights

53 data points
Beta

Revenue

$36.91B

66.5% Gross Margin

Net Income

$11.65B

31.6% Net Margin

EPS (Diluted)

$1.51

Total Assets

$282.79B

Cash & Equivalents

$8.86B

Free Cash Flow

$7.13B

Financial Statements
Beta
Revenue$36.91B
Cost of Revenue$12.36B
Gross Profit$24.55B
R&D Expenses$4.60B
Operating Income$13.89B
Interest Expense$654.00M
Net Income$11.65B
EPS (Basic)$1.53
EPS (Diluted)$1.51
Shares Outstanding (Basic)7.62B
Shares Outstanding (Diluted)7.69B

Key Highlights

  • 1Total revenue grew 14% year-over-year to $36.9 billion.
  • 2Commercial cloud revenue increased by a substantial 39% to $12.5 billion, with Azure revenue up 62%.
  • 3Productivity and Business Processes segment revenue increased 17% driven by Office Commercial and LinkedIn.
  • 4Intelligent Cloud segment revenue increased 27%, primarily due to server products and cloud services.
  • 5More Personal Computing segment revenue saw a modest 2% increase, with Windows OEM licensing performing strongly.
  • 6Operating income increased 35% to $13.9 billion, reflecting improved gross margins and efficient expense management.
  • 7Diluted earnings per share rose 40% to $1.51.

Frequently Asked Questions

The Intelligent Cloud segment's revenue increased by 27% to $11.9 billion, primarily driven by server products and cloud services, which grew 30%. This growth was substantially fueled by Microsoft Azure, which saw a remarkable 62% increase in revenue, attributed to higher consumption-based services and per-user services. Additionally, growth in hybrid and premium solutions, along with demand related to the end of support for Windows Server 2008, also contributed to the increase in server products revenue.

Microsoft's commercial cloud revenue surged by 39% to $12.5 billion. This segment, which includes Office 365 Commercial, Microsoft Azure, and other commercial cloud properties, is a key driver of profitability. The increase in high-margin cloud services contributed significantly to a 22% increase in gross margin and a 35% rise in operating income, demonstrating the company's successful transition towards a cloud-centric business model.

Microsoft maintains a very strong liquidity position. As of December 31, 2019, the company held $134.3 billion in cash, cash equivalents, and short-term investments. This substantial liquidity provides ample financial flexibility for operations, strategic investments, and shareholder returns.

Microsoft is involved in various ongoing legal and regulatory matters. While most individual patent infringement cases are not material, there are ongoing antitrust investigations in China and class action lawsuits in Canada related to operating system and productivity software. The company has accrued $319 million for legal liabilities and estimates potential additional losses of up to $900 million beyond recorded amounts. Management believes that resolving these claims, individually or in aggregate, will not have a material adverse impact, but these matters are subject to inherent uncertainties.