Placeholder Image

Subtitles section Play video

  • Greetings, and welcome to the Microsoft Fiscal Year 2018 Fourth Quarter Earnings Conference

  • Call.

  • (Operator Instructions) As a reminder, this conference is being recorded.

  • It is now my pleasure to introduce your host, Michael Spencer, General Manager of Investor

  • Relations.

  • Thank you, sir.

  • You may begin.

  • Good afternoon and thank you for joining us today.

  • On the call with me are Satya Nadella, CEO; Amy Hood, CFO; Frank Brod, CAO; and Carolyn

  • Frantz, Deputy General Counsel and Corporate Secretary.

  • On the Microsoft IR website, you can find our earnings press release and financial summary

  • slide deck, which is intended to supplement our prepared remarks during today's call and

  • provides reconciliation of differences between the GAAP and non-GAAP financial measures.

  • Unless otherwise specified, we refer to non-GAAP metrics on the call.

  • The non-GAAP financial measures provided should not be considered as a substitute for, or

  • superior to, the measures of financial performance prepared in accordance with GAAP.

  • They are included as additional clarifying items to aid investors in further understanding

  • the company's fourth quarter performance, in addition to the impact that these items

  • and events had on the financial results.

  • All growth comparisons we make on the call today relate to the corresponding period of

  • last year, unless otherwise noted.

  • We will also provide growth rates in constant currency when available as a framework for

  • assessing how our underlying businesses performed, excluding the effect of foreign currency rate

  • fluctuations.

  • Where growth rates are the same in constant currency, we refer to growth rate only.

  • We will post our prepared remarks to our website immediately following the call until the complete

  • transcript is available.

  • Today's call is being webcast live and recorded.

  • If you ask a question, it will be included in our live transmission, in the transcript

  • and in any future use of the recording.

  • You can replay the call and view the transcript on the Microsoft IR website.

  • (Forward-Looking Cautionary Statements) And with that I'll turn the call over to Satya.

  • Thank you, Mike and thanks to everyone on the phone for joining.

  • I'm proud of our strong results this quarter and even more proud of what we've accomplished

  • over the last 12 months.

  • We delivered more than $110 billion in revenue for the full-year with double-digit top line

  • and bottom line growth.

  • And our commercial cloud business surpassed more than $23 billion in revenue for the year

  • with gross margin expanding to 57%.

  • The strength of our results reflects accelerating innovation and the trust customers are placing

  • in us to power their digital transformation.

  • I shared our vision for the intelligent cloud and the intelligent edge a little over a year

  • ago, a vision that is now quickly becoming reality, and impacting every customer in every

  • industry.

  • Everything we've accomplished this year has been about accelerating our lead in this new

  • era and the tremendous opportunity ahead.

  • We focus on the right secular technology trends and growing markets and follow that up with

  • solid roadmap execution.

  • We reorganized our engineering teams to break free of the categories of the past and better

  • align with the emerging tech stack from Silicon to AI to experiences, to better serve the

  • needs of our customers today and long into the future.

  • We reoriented our sales and marketing teams adding industry and technical expertise to

  • partner more deeply with our customers on their digital transformation journeys.

  • And most importantly, we drove innovation to deliver differentiated value across the

  • cloud and the edge.

  • Now I'll briefly highlight some of our innovation in momentum.

  • We introduced Microsoft 365 to empower employees in the modern workplace.

  • Microsoft 365 is now a multi-billion dollar business that gives our customers the path

  • to the cloud and broadens our reach with new and under penetrated markets, including more

  • than 2 billion first line workers and industry-specific workflows.

  • Across Microsoft 365, we are helping people be more productive, collaborate and stay secure

  • on any device with AI infused experiences they use every day, and it's driving usage.

  • We have more than 135 million users of Office 365 commercial, Outlook Mobile is being used

  • on more than 100 million iOS and android devices, and more than 200,000 organizations are using

  • Microsoft Teams as the hub for team work.

  • We invested to make Windows 10 the most modern, secure always up-to-date operating system.

  • Windows 10 is now active on nearly 700 million devices and the growth of the enterprise deployment

  • this year exceeded our expectations.

  • It was a record year for LinkedIn.

  • Now with more than 575 million members, and revenue growth of 37% in Q4, the fifth consecutive

  • quarter of revenue acceleration.

  • We saw record levels of engagement in job postings again this quarter with sessions

  • growth up 41% YoverY.

  • The strong engagement is driven by the quality of the feed, video messaging and acceleration

  • of mobile usage with mobile sessions up more than 55% YoverY.

  • We will continue to reinvest to make LinkedIn the essential platform to connect the world's

  • professionals and help them achieve more with experiences followed by LinkedIn and Microsoft

  • Graphs.

  • Dynamics 365 gives organizations an alternative to monolithic style of suites of business

  • location with modular modern extensible and AI driven apps that unlock insights across

  • every part of the organization, from sales to HR.

  • It gained traction as our third commercial cloud growth engine with revenue up 61% YoverY.

  • Our investments in Power BI, PowerApps and Flow, as the new analytics and application

  • platform are gaining significant momentum with ISVs and enterprise customers.

  • Azure is the only hyper-scale cloud that extends to the edge across identity, data, application

  • platform, security and management.

  • And our differentiated architectural approach drove another strong quarter of growth.

  • We are investing aggressively to build Azure as the world's computer.

  • We expanded our global data center footprint to 54 regions, more than any other cloud provider

  • and with the most comprehensive compliance coverage in the industry.

  • We added nearly 500 new Azure capabilities in the last year alone focused on both existing

  • workloads and new workloads such as IoT and AI at the edge.

  • We introduced Azure Stack and Azure Sphere, two first of their kind cloud to edge solutions

  • that are already seeing strong customer demand.

  • We're democratizing data science and AI with Azure Cognitive Services, Azure ML and data

  • services such as Azure Cosmos DB to help organizations of all sizes convert their data into insights

  • and experiences for competitive advantage.

  • The world's leading companies are running on Azure and I'm especially proud that Walmart

  • chose Azure and Microsoft 365 to accelerate its digital transformation for their associates

  • and customers.

  • In gaming, we are pursuing our expansive opportunity from the way games are created and distributed

  • to how they're played and viewed, surpassing $10 billion in revenue this year for the first

  • time.

  • We are investing aggressively in content, community and cloud services across every

  • end point to expand usage and deepening engagement with gamers.

  • The combination of XBox Live, Game Pass subscriptions and (inaudible) are driving record levels

  • of growth and engagement.

  • Not only are we investing to grow organically, but we're also investing inorganically in

  • opportunities that expand our total addressable market and accrue value to our platforms and

  • our customers.

  • Take LinkedIn, we have united the world's leading professional cloud with the world's

  • leading professional network and proved that we have an integration model that works, enabling

  • LinkedIn to accelerate growth while retaining its member-first ethos.

  • With Get Help, we recognized the increasingly vital role the developers play in value creation

  • and growth in the era of the intelligent cloud and intelligent edge.

  • Our pending acquisition will enable us to bring our tools and services to new audiences,

  • while enabling Get Help to grow and retain its independence and developer-first ethos

  • in community.

  • PlayFab accelerates our vision to build a world class cloud platform for the gaming

  • industry across mobile, PC and console and the addition of five new gaming studios bolsters

  • our first body content development to support our fast-growing gaming services.

  • Microsoft has always been a partner-led company, and partners increasingly see more opportunity

  • on our platforms inspiring leading companies like SAP, Adobe and GE as well as fast-growing

  • start-ups like in Mobi to play an even larger role in our vibrant and growing partner ecosystems,

  • an asset that gives us scale in this new era.

  • In closing, our opportunity has never been greater.

  • We will continue to innovate and invest across our solution areas in serving our customers

  • and their unmet and un-articulated needs.

  • With this tremendous opportunity comes great responsibility.

  • We're relentlessly working to instill trust in technology across everything we do, it's

  • why we will continue to lead the industry dialogue on trust, advocate for customer privacy,

  • drive industry-wide cybersecurity initiative and champion ethical AI.

  • Our investments in business model are fundamentally aligned with our customer's long-term interests

  • and success.

  • This opportunity and responsibility grounds up in our mission to empower every person

  • and every organization on the planet to achieve more.

  • I'm proud of our progress and I'm proud of the more than 100,000 Microsoft employees

  • around the world, who are focused on our customer success in this new era.

  • Now I'll hand over to Amy, who will cover our financial results in detail and share

  • our outlook and I look forward to rejoin you for the questions.

  • Thank you, Satya and good afternoon, everyone.

  • This quarter, revenue was $30.1 billion, up 17% and 15% in constant currency.

  • Gross margin dollars increased 19% and 16% in constant currency.

  • Operating income increased 30% and 24% in constant currency.

  • Earnings per share was $1.13, increasing 7% and 3% at constant currency.

  • As a reminder, FY17 included a $1.8 billion tax benefit related to previously non-deductible

  • losses.

  • In our largest quarter of the year, our sales teams and partners delivered exceptional commercial

  • results.

  • We saw strong performance in most of our geographic regions against the backdrop of favorable

  • macroeconomic conditions and positive IT spending trends.

  • Customer commitment to our top platform continues to increase.

  • In F Y18, we closed a record number of multi-million dollar commercial cloud agreement and more

  • than doubled the number of $10 million plus Azure agreements.

  • Our annuity mix increased 3 points year-over-year to 89%.

  • As a result, commercial bookings increased 18% even with a strong prior year comparable.

  • Commercial unearned revenue was $29 billion, growing 23% and 21% in constant currency,

  • significantly higher than anticipated due to stronger than expected cloud billings.

  • Our commercial cloud revenue was $6.9 billion, growing 53% and 50% in constant currency with

  • strong performance across the US, Western Europe and the UK.

  • Commercial cloud gross margin percentage increased 6 points to 58%.

  • In line with our commitment at the beginning of the year, we improved the gross margin

  • percentage in each cloud service with Azure seeing the most significant improvement.

  • Our company gross margin percentage was 68%, ahead of our expectation and up 1 point year-over-year

  • from improvement on personal computing segment driven by Surface.

  • FX increased revenue growth by 2 points, 1 point lower than anticipated due to a stronger

  • US dollar.

  • At the segment level, FX had a positive impact of 3 points on productivity and business process

  • within intelligent cloud and 1 point on more personal computing revenue.

  • The FX impact was immaterial.

  • This quarter, operating expenses were 9% and 8% in constant currency, above our expectations

  • due to revenue driven expense, such as sales compensation given the strength of the quarter

  • and severance expense primarily in our sales organizations, offset by FX favourability.

  • Strong revenue growth improved device gross margin percentage and continued to targeted

  • investment in cloud engineering, cloud sales capacity and LinkedIn created operating income

  • leverage.

  • This quarter, operating income increased again up 3 points year-over-year.

  • Now to our segment results.

  • Revenue from productivity and business processes was $9.7 billion, increasing 13% and 10% in

  • constant currency, in line with our expectations even with the headwinds from a stronger dollar

  • and a higher-than-anticipated mix of cloud billings in our Office Commercial and Dynamics

  • businesses during the quarter.

  • As a reminder, under ASC 606, cloud revenue is ratably recognized, while annuity on-premises

  • revenue has a component of upfront recognition.

  • A higher mix of cloud billings is reflected in more on our revenue and less in period

  • recognition in a quarter.

  • Office Commercial revenue increased 10% and 8% in constant currency.

  • Office 365 Commercial revenue grew 38% and 35% in constant currency and Office 365 Commercial

  • Seats grew 29%.

  • We continue to see healthy installed base growth and ARPU expansion from customer adoption

  • of premium workloads in E3 and E5.

  • Office consumer revenue increased 8% and 6% in constant currency, driven by recurring

  • subscription revenue and growth in the subscriber base, now at 31.4 million.

  • Our Dynamics business grew 11% and 8% in constant currency, with double digit billings growth.

  • Dynamic 365 grew 61% and 56% in constant currency.

  • LinkedIn revenue grew 37% and 34% in constant currency with strong execution across all

  • businesses.

  • As Satya highlighted, engagement continue to accelerate and we also saw record levels

  • of job postings, benefiting from a robust US job market.

  • Segment gross margin dollars grew 13% and 10% in constant currency.

  • Gross margin percentage was relatively unchanged year-over-year, even as cloud mix increased,

  • driven by margin expansion in Office 365 and LinkedIn.

  • Operating expenses increased 7% as we continue to invest in LinkedIn, cloud engineering and

  • commercial sales capacity.

  • Operating income increased 20% and 13% in constant currency.

  • Revenue from the intelligent cloud segment was $9.6 billion, increasing 23% and 20% in

  • constant currency, with better than expected results in both our on-premise and Azure businesses.

  • Server products and cloud services revenue increased 26% and 24% in constant currency,

  • driven by continued strong Azure revenue growth of 89% and 85% in constant currency.

  • Azure producer services have performed ahead of expectations with our enterprise and mobility

  • installed base growing 55% year-over-year to over $82 million.

  • Our on-premises server business grew 8% and 6% in constant currency with double-digit

  • growth in premium server products revenue and healthy renewals benefiting from a significant

  • value customers seek in our hybrid solutions.

  • Enterprise Services revenue grew 8% and 7% in constant currency, as growth in Premier

  • Support Services and Microsoft Consulting Services was partially offset by declining

  • customer support agreements for Windows Server 2003.

  • Segment gross margin dollars increased 23% and 20% in constant currency.

  • Gross margin percentage was relatively unchanged as material improvement in the Azure gross

  • margin percentage was offset by a growing mix of Azure IaaS and PaaS revenues.

  • Operating expenses increased 11% with ongoing investments in cloud engineering and sales

  • capacity to support top line growth.

  • Operating income grew 34%, up 30% in constant currency.

  • Finally, More Personal Computing.

  • Revenue was $10.8 billion, up 17% and 16% in constant currency, with better than expected

  • results in Windows Commercial, OEM Pro and Surface.

  • In the commercial space, we saw an accelerating pace of Windows 10 Enterprise deployment this

  • quarter.

  • Customer demand for modern and secure hardware and stronger than expected PC growth in geographies

  • were (inaudible) high contributed to OEM revenue growth of 14%, ahead of the overall commercial

  • market.

  • Windows Commercial Products and Clouds Services grew 23% and 19% in constant currency, driven

  • by double-digit billings growth as well as the higher mix in quarter recognition for

  • multi-year agreements.

  • In Consumer, OEM non-pro revenue declined 3%, slightly below the consumer PC market

  • driven by continued pressure in the entry level price category, even as we continued

  • to take share in the premium category.

  • Inventory levels were within the normal range.