Microsoft Conference Call Summary
Microsoft (NASDAQ: MSFT) reported its second quarter earnings on April 24, 2014. Shares of the company are up 0.51 percent or $0.36 per share to $71.45. Below are some key takeaways from its conference call:
Satya Nadella, Chief Executive Officer:
• It's been an incredibly busy couple of months. In addition to executing on our plan and announcing new products and services, I've spent a lot of time gathering feedback and exchanging ideas with customers, partners, employees and investors. It is important and valuable to see the company with a fresh perspective, to get grounded both in our current realities and future opportunities.
• When I think about our industry over the next five, ten years, I see a world where computing is more ubiquitous and all experiences are powered by ambient intelligence. Silicon, hardware systems and software will co-evolve together and give birth to a variety of new form factors.
• We saw continued improvement in search, with our U.S. search share growing to 18.6% and search revenue increasing by 38%. Bing continues to deliver platform capabilities across our products. One recent example of this is the recently announced Cortana Virtual Assistant for Windows Phone.
• We will continue to invest in our cloud capabilities, including Office 365 and Azure in the fast-growing SaaS and cloud platform markets. We are committed to ensuring that our cloud services are available across all device platforms that people use. We are delivering a cloud for everyone on every device.
• At the same time, we have bold plans to move Windows forward. We are investing and innovating in every dimension, from form factor to software experiences to price.
Amy Hood, Chief Financial Officer:
• We had a very good third quarter with solid results across our businesses and strong momentum in our most strategic areas. At the same time, we remained focused and disciplined in our spending.
• Total revenue was $20.4 billion, up 8%, and earnings per share grew 5%. We had outstanding momentum and results in our cloud services. As Satya mentioned, commercial cloud revenue more than doubled again this quarter. Office 365 is now on an annual revenue run rate of $2.5 billion, and Azure revenue grew over 150%, driven by both new customers and increased users.
• In our Office 365 Home service we added nearly one million new users this quarter and now have over 4.4 million subscribers. We continue to enhance its value proposition with new features, premium services and cross-platform functionality.
• Display revenue, related to portal and e-mail, declined, while we saw ad revenue growth in products like Skype and Xbox. Importantly, we are innovating while expanding our cloud gross margins through both improved scale and continuous engineering efforts to drive efficiency.
• Businesses are clearly expressing their overwhelming preference for Windows. Windows Pro revenue grew 19% driven by growth in business PCs, mix shift to developed markets where attach is higher, continued strength in the enterprise and an increased mix of Pro in small and medium businesses. Windows volume licensing also had a solid 11% revenue growth.
• Therefore, our commercial unearned revenue grew 12% this quarter, which was above our expectations, and our contracted not-billed balance exceeded $22 billion. We had double-digit growth in SQL, System Center, Windows Server Premium and Lync. Clearly, our value proposition and product road map is resonating.
• Xbox One has sold-in over five million units since launch and engagement has been high, with users spending nearly five hours per day on their consoles. We will continue to extend the unique entertainment value proposition of Xbox One, particularly in markets outside of the U.S. where some services aren't as mature.
• Xbox 360 sales exceeded our expectations this quarter, and across the platform, Xbox Live members continued to embrace the service, with transactional revenue growing 17%. We do expect to work through some inventory in Q4.
• In licensing we expect revenue to be $4.1 billion to $4.3 billion. This range reflects an expectation that the benefits of XP end-of-support will moderate. In hardware, we expect revenue to be $1.3 billion to $1.5 billion in what is a seasonally slower hardware quarter.
• Within this, we expect commercial other revenue to be about $2.1 billion on the strength of the transition to our cloud. And in corporate, we expect to defer revenue of about $100 million. We expect COGS to be $5.7 billion to $5.8 billion with variability primarily due to hardware.
• For the fourth quarter we expect OpEx to be $8.4 billion to $8.6 billion when adjusting for the prior year European Commission fine. This represents full year operating expense growth of about 4%. This is on the low end of our original guidance that we provided a year ago of 4% to 6%, as we invest in R&D and sales efforts while rationalizing our marketing spend.
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