Market Overview

Highlights From Microsoft's Q1 Conference Call


Satya Nadella hosted Microsoft Corporation's (NASDAQ: MSFT) first quarter 2015 conference call last Thursday.

The newly appointed CEO received a warm reception from investors.

Quarterly Highlights

Below are some notable accomplishments highlighted by Nadella.

Nadella praised his employees for embracing his new vision of evolving the corporate culture "to be fast, innovative partner-friendly and customer obsessed."

Cloud computing revenue grew 128 percent from a year ago, marking the fifth consecutive quarter of posting a triple-digit growth rate.

Consumer Office 365 has grown to more than seven million subscribers during the quarter, representing a 26 percent increase.

More than 60 percent of Azure customers are using at least one premium service such as Enterprise Mobility Suite. Nadella stated that these premium services create new monetization opportunities.

Microsoft introduced and expanded a set of Windows offering which contributes to driving consumer growth. The company shared its Windows 10 plans with customers in September and will "deliver a single unified application development platform" and will be "the most collaborative version of Windows" ever made.

Surface Pro 3 is now available in 28 markets, while Microsoft is seeing share growth with its Lumia device across Europe.

Microsoft increased its Xbox console unit sales from a year ago and grew users of Xbox LIVE apps by more than 20 percent. The company expects its acquisition of Mojang to close in November.

CFO Breaks Down The Numbers

Following Nadella's quarterly highlights,Microsoft's Chief Financial Officer Amy Hood delivered a financial recap of the quarter.

Revenue for the quarter rose 25 percent from a year ago to $23.2 billion, and rose 11 percent excluding phones. Earnings per share were $0.54 in the quarter, including an $0.11 negative impact from integration and restructuring expenses.

Geographically, the strongest performance was seen in the U.S. and Europe while a "more challenging environment" was seen in China and Russia. Hood expects this trend to continue in to the fourth quarter.

Commercial business saw its revenue grow by 10 percent as the company continues to heavily invest in higher level services and new scenarios in Azure enabled by the scale, cost and flexibility of the cloud. Revenue from premium services were 25 percent higher during the quarter.

Windows OEM Pro revenue performed in line with broad business PC market as Windows volume licensing grew 10 percent. Consumer Office revenue inclusive of subscription offerings grew 7 percent as IP licensing revenue declined in the quarter.

Bing continued to see revenue growth and demonstrated a double-digit monetization gain. Hood expects Bing to be profitable in fiscal 2016. Additionally, Hood expects Phone Hardware to reach breakeven in fiscal 2015.

Microsoft's effective tax rate during the quarter was 23 percent. During the quarter the company's capital expenditure totaled $1.3 billion. Expenditures are unlikely to fall as Hood said the company continues to expand the capacity and locations of its data centers.

Operating margins improved to 30.1 percent,

Microsoft returned $4.6 billion to shareholders through buybacks and dividends in the quarter.

Question and Answer

Following prepared remarks by Nadella and Hood, the executives fielded questions from analysts. Below are some notable quotes.

Nadella on cloud computing: "The cloud story I think is fairly clear at this point. The combination of Office 365, as well as Dynamics CRM in particular combined with Azure are driving our cloud growth."

Hood on gross margins: "I think we continue to see gross margin improvement and that is sustainable improvement as opposed to I think what you characterized as some non-recurring things that I have mentioned. It continues to be improvements in scale, improvements in our infrastructure, improvements in utilization, really strong work across all of our engineering teams here."

Nadella on Windows 10: "Windows 10 is something that's completely optimized for the enterprise and across all same sizes for the mobile worker, as well as the desktop and large screens. Perhaps one of the most unique things about at least our portfolio and our innovation is that we think that it's the mobility of the individual not the one device. That is important in the enterprise and that's what we are building towards with great management and great security."


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