Commercial cloud annualized revenue run rate exceeds $18.9 billion

REDMOND, Wash. — July 20, 2017 — Microsoft Corp. today announced the following results for the quarter ended June 30, 2017:

• Revenue was $23.3 billion GAAP, and $24.7 billion non-GAAP
• Operating income was $5.3 billion GAAP, and $7.0 billion non-GAAP
• Net income was $6.5 billion GAAP, and $7.7 billion non-GAAP
• Diluted earnings per share was $0.83 GAAP, and $0.98 non-GAAP

“Innovation across our cloud platforms drove strong results this quarter,” said Satya Nadella, chief executive officer at Microsoft, “Customers are looking to Microsoft and our thriving partner ecosystem to accelerate their own digital transformations and to unlock new opportunity in this era of intelligent cloud and intelligent edge.”

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (“GAAP”) to non-GAAP financial results. Microsoft has provided this non-GAAP financial information to aid investors in better understanding the company’s performance. Additional information regarding our non-GAAP definition is provided below. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. All growth comparisons relate to the corresponding period in the last fiscal year.

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The current quarter effective tax rate was (17)% an (6)% in GAAP and non-GAAP, respectively. The tax rates reflect a $1.8 billion impact related to the utilization of prior years’ losses from Microsoft’s phone business that were not deductible in the years incurred. As a result of this tax item, earnings per share for the quarter increased by $0.23.

Microsoft returned $4.6 billion to shareholders in the form of share repurchases and dividends in the fourth quarter of fiscal year 2017.

“We delivered a strong finish to the year with 30% growth in commercial bookings this quarter,” said Amy Hood, executive vice president and chief financial officer at Microsoft. “We will continue to invest in key areas that drive future growth for Microsoft and our customers.”

Revenue in Productivity and Business Processes was $8.4 billion and increased 21% (up 23% in constant currency), with the following business highlights:

• Office commercial products and cloud services revenue increased 5% (up 6% in constant currency) driven by Office 365 commercial revenue growth of 43% (up 44% in constant currency)
• Office consumer products and cloud services revenue increased 13% (up 13% in constant currency) and Office 365 consumer subscribers increased to 27.0 million
• Dynamics products and cloud services revenue increased 7% (up 9% in constant currency) driven by Dynamics 365 revenue growth of 74% (up 75% in constant currency)
• LinkedIn contributed revenue of $1.1 billion during the quarter

Revenue in Intelligent Cloud was $7.4 billion and increased 11% (up 12% in constant currency), with the following business highlights:

• Server products and cloud services revenue increased 15% (up 16% in constant currency) driven by Azure revenue growth of 97% (up 98% in constant currency)
• Enterprise Services revenue decreased 3% (down 1% in constant currency) with declines in custom support agreements offset by growth in Premier Support Services

Revenue in More Personal Computing was $8.8 billion and decreased 2% (down 1% in constant currency) driven primarily by lower phone revenue, with the following business highlights:

• Windows OEM revenue increased 1% (up 1% in constant currency), slightly ahead of the overall PC market
• Windows commercial products and cloud services revenue increased 8% (up 8% in constant currency) driven by annuity revenue growth
• Surface revenue decreased 2% (down 1% in constant currency) mainly due to product lifecycle transitions
• Search advertising revenue excluding traffic acquisition costs increased 10% (up 11% in constant currency) driven by higher revenue per search and search volume
• Gaming revenue increased 3% (up 4% in constant currency) as strength in Xbox software and services offset lower hardware revenue

Fiscal Year 2017 Results

Microsoft Corp. today announced the following results for the fiscal year ended June 30, 2017:

• Revenue was $90.0 billion GAAP, and $96.7 billion non-GAAP
• Operating income was $22.3 billion GAAP, and $29.3 billion non-GAAP
• Net income was $21.2 billion GAAP, and $25.9 billion non-GAAP
• Diluted earnings per share was $2.71 GAAP, and $3.31 non-GAAP

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (“GAAP”) to non-GAAP financial results. All growth comparisons relate to the corresponding period in the last fiscal year.

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The current year effective tax rate was 8% and 14% in GAAP and non-GAAP, respectively. The tax rates reflect a $1.8 billion impact related to the utilization of prior years’ losses from Microsoft’s phone business that were not deductible in the years incurred. As a result of this tax item, earnings per share for the year increased by $0.23.

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.

Webcast Details

Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, John Seethoff, deputy general counsel and corporate secretary, and Chris Suh, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on July 20, 2018.

“As Adjusted” Financial Results and non-GAAP Measures

During fiscal year 2017 and fiscal year 2016, GAAP revenue, operating income, net income, and diluted earnings per share include the net impact from Windows 10 revenue deferrals. During fiscal year 2017 and fiscal year 2016, GAAP operating income, net income, and diluted earnings per share include restructuring expenses. During fiscal year 2016, GAAP operating income, net income, and diluted earnings per share also include impairment expenses. These items are defined below. In addition to these financial results reported in accordance with GAAP, Microsoft has provided certain non-GAAP financial information to aid investors in better understanding the company’s performance. Presenting these non-GAAP measures gives additional insight into operational performance and helps clarify trends affecting the company’s business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance.

Net Impact from Windows 10 Revenue Deferrals. With respect to our non-GAAP measures related to Windows 10 revenue, we believe these measures bridge investor information and minimize potential confusion during the brief period between the time Windows 10 revenue recognition moved from upfront to ratable, and the adoption of the new revenue standard, when Windows 10 will again be recognized predominantly upfront. The net change in Windows 10 revenue from period to period is indicative of the net change in revenue we expect from adoption of the new revenue standard.

Non-GAAP Definitions

Net Impact from Windows 10 Revenue Deferrals. Microsoft recorded net revenue deferrals of $1.4 billion during the three months ended June 30, 2017 and net revenue deferrals of $6.7 billion during the twelve months ended June 30, 2017, related to Windows 10. Microsoft recorded net revenue deferrals of $2.0 billion during the three months ended June 30, 2016 and net revenue deferrals of $6.6 billion during the twelve months ended June 30, 2016, related to Windows 10.

With the launch of Windows 10 in July 2015, Windows 10 customers receive future versions and updates at no additional charge. Under current revenue recognition accounting guidance, when standalone software is sold with future upgrade rights, revenue must be deferred over the life of the computing device on which it is installed. This is different from prior versions of Windows, which were sold without upgrade rights, where all revenue from original equipment manufacturer (“OEM”) customers was recognized at the time of billing, i.e., upfront.

When Microsoft adopts the new revenue standard, predominantly all Windows OEM revenue will be recognized at the time of billing, which is similar to the revenue recognition for prior versions of Windows. Microsoft reflects the recognition of Windows 10 revenue at the time of billing in “As Adjusted (non-GAAP)” revenue to provide comparability during the short period where Windows 10 will be recognized over the estimated life of a device, i.e., ratably, rather than at the time of billing.

Impairment and Restructuring Expenses. During the fourth quarter of fiscal year 2017, Microsoft recorded $306 million of restructuring charges primarily related to its sales and marketing restructuring plan. During the fourth quarter of fiscal year 2016, Microsoft recorded restructuring and related impairment expenses of $1.1 billion, including $630 million of asset impairment charges which reflected the performance of its phone business, and $480 million of restructuring charges primarily related to its previously announced phone business restructuring plans.

New Revenue Standard

In May 2014, the Financial Accounting Standards Board issued a new standard related to revenue recognition. We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which will require us to restate each prior reporting period presented.

The most significant impact of the standard relates to our accounting for revenue from Windows 10 licensing as previously described. Additionally, for certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance, we will recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings including Office 365, LinkedIn, and professional services will remain substantially unchanged.

We expect to share more information on adoption of the new standard in early August 2017.

Constant Currency

Microsoft presents constant currency information to provide a non-GAAP framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period non-GAAP results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year.

Financial Performance Constant Currency Reconciliation

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Segment Revenue Constant Currency Reconciliation

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Commercial Cloud Annualized Revenue Run Rate

Commercial cloud annualized revenue run rate is calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics 365, and other cloud properties.