Microsoft Q1 2015 Earnings Review

  • Microsoft reported a solid quarter, which was driven by better than expected growth in many of its reporting segments.
  • Microsoft’s subscription businesses: Office 365, Xbox Live, Azure, Microsoft CRM, and Skype reported solid growth rates which drove consolidated revenue growth in the most recent quarter. Hardware also saw meaningful volume growth as well.
  • However, revenue outlook for the next quarter was underwhelming.
  • It’s highly likely that Microsoft low balled its revenue outlook, just to be conservative.
Microsoft Q1 2015 earnings review

Microsoft (NASDAQ:MSFT) reported a fairly solid quarter in terms of sales growth metrics; however earnings did slide, albeit marginally, which was driven by a restructuring charge that negatively impacted net income by $1.14 billion. The stock appreciated following the earnings announcement, which was driven by results that beat sales and earnings estimates. The company was extremely optimistic in many of its emerging business categories, and continued to reiterate how friendly the company is to shareholders as the share buyback amount has increased by 19% year-over-year.

Microsoft Q1 2015 earnings summary
Source: Microsoft

The company reported $23.2 billion in revenue in the most recent fiscal quarter, which beat consensus estimates set at $22.02 billion. The company grew revenue by 25% year-over-year, which for a company of that size is a fairly impressive growth rate.  Also, Microsoft increased the capital return program by 19%, and the company mentioned in the quarterly earnings conference call that it would continue to look for ways to enrich shareholder value. Assuming Microsoft continues to grow sales and earnings, the company will increase the dividend payout, and share buyback program.

Microsoft D&C licensing segment revenue
Source: Microsoft

In the most recent quarter, Microsoft reported that the licensing side of the business had declined especially on the consumer end of the spectrum. This was driven by a sales mix shift to Office 365, decline in the number of Windows PC shipments, and a decline in average licensing revenue per unit in the mobile handset segment. However, other segments saw meaningful earnings/sales growth, which offset the negative impact from device and consumer licensing.

For example, the Nokia handset business saw meaningful sequential growth, as Q2 figures were $1.98 billion versus $2.61 billion in Q3. Nokia grew its revenue sequentially by 31%, which was driven by a shift in its handset business model to market mid-tier devices over feature phones. Due to a marketing push, product execution in which a broader range of price points were offered, along with retail distribution across Microsoft retail stores, the Nokia segment reported a solid quarter.

Microsoft computing and gaming revenue
Source: Microsoft

Sales of the Xbox platform grew by 54% and the entire segment grew by 74% year-over-year, and GAAP gross profit improved by 134%. In the prior quarter the Xbox One and the Surface Pro tablet negatively impacted profitability. Some industry experts criticized Microsoft’s tablet segment for not generating a profit yet. However, the company was able to offset the weakness in both gaming and tablet, as shipment volumes, and profitability improved. Furthermore, the gaming business (Halo, and various other Microsoft titles), Xbox Live, and etc. continue to drive margins and revenue growth as well.

Microsoft total commercial segment revenue
Source: Microsoft

On the enterprise side of the spectrum, Microsoft Azure (cloud) grew 128% year-over-year. Commercial Office 365 subscriptions also contributed to the other commercial segment. However, the company reported that volume licensing for Windows Office had declined, which was why licensing revenue grew at a slower clip, or 3% year-over-year. However, its server related license business like SQL server and Windows server grew by 11% year-over-year.  When combining license and subscription revenue, the company reported 10% year-over-year growth in its commercial segment.  In the conference call management was highly confident in the competitiveness of its enterprise platform.

Because Microsoft has so many reporting segments, it’s somewhat difficult to go into great depth, as each segment could be a Fortune 500 company. However, going forward Microsoft has plenty of meaningful catalysts that can drive sales and earnings growth in upcoming quarters due to the favorable mix of subscriptions over perpetual licenses, and the high rates of growth emerging business categories are exhibiting. Admittedly, Microsoft’s revenue outlook for the next quarter was $26.5 billion, which is below the consensus revenue estimate of $27.87 billion. In a sense, Microsoft could be low balling its outlook, which was the case in FY Q1 2015.

However, to summarize, Microsoft has plenty of upside in many of the businesses that it currently engages in, and it would not surprise me if Microsoft were to report another stellar quarter, or even a stellar year in 2015.

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