Microsoft released their earnings report for Q4 of fiscal year 2015. The numbers certainly reflect the massive write down of the Nokia acquisition that CEO Satya Nadella announced earlier in the month. For the three months ending June 30 2015, Microsoft had $22.18 billion in revenue which is down 5.1% year-over-year. Gross margin for Q4 2015 was $14.7 billion, but thanks to $8.4 billion in impairment, integration, and restructuring costs, operating income was a $2.1 billion loss, which is down 131% as compared to Q4 2014. Despite the operating loss, Microsoft is still looking at $1.439 billion in taxes, so their net income for Q4 2015 is a loss of $3.195 billion. This results in a loss of $0.40 per share.

For the full fiscal year 2015, Microsoft had revenue of $93.6 billion which is up 7% over their 2014 numbers. However the cost of that revenue was up almost six billion, so their gross margin was almost flat at $60.5 billion. For the full fiscal year 2015, Microsoft incurred just over $10 billion in impairment, integration, and restructuring charges, with the majority being in Q4 with the Nokia write down, which gave them an operating income of $18.161 billion for the year, down from almost $28 billion a year ago. Net income came in at $12.2 billion for the year, down from $22.1 billion a year ago. Earnings per share for the full year were $1.48 per diluted share, down from $2.63 a year ago.

Microsoft Q4 2015 Financial Results (GAAP)
  Q4'2015 Q3'2015 Q4'2014
Revenue (in Billions USD) $22.180 $21.729 $23.382
Operating Income (in Billions USD) -$2.053 $6.594 $6.482
Gross Margin (in Billions USD) $14.712 $14.568 $15.749
Margins 66.3% 67% 67.4%
Net Income (in Billions USD) -$3.195 $4.985 $4.612
Basic Earnings per Share (in USD) -$0.40 $0.61 $0.55

It is going to be difficult for any company to write down over $8 billion in a quarter and still turn a profit (Apple is the only exception right now in the tech industry) but that one time charge is now off the books and they can move into 2016 with a clean slate. There will likely be some more restructuring charges with the upcoming layoffs announced a couple of weeks ago, but that should impact financials too drastically for FY 2016.

Microsoft reports its income in two over-arching units with Devices and Consumer being the one focused towards end users, and Commercial which is targeted to business and enterprise customers. Each is further broken down into various subgroups which we can take a look at in depth.

For Devices and Consumers (D&C), revenue declined 13% to $8.7 billion for the quarter. The biggest hit to the bottom line was in the D&C Licensing, with Windows OEM revenue dropping 22% following the end of the Windows XP refresh cycle. Unit inventory is also being managed ahead of the Windows 10 launch. Windows Phone licensing revenue was down 68%, but that is compared to Q4 2014 where there was a recognition of $382 million from the conclusion of the commercial agreement with Nokia, and Windows Phone revenue has taken a bit of a nosedive since it was made free to all OEMs, and with Microsoft obviously not charging itself when selling Lumia handsets. The final piece of D&C Licensing is Office Consumer, which is the full license for Office, and it is down 42% year-over-year. Japan’s PC market contributed to 19 pts of revenue decline itself, and an additional 13 pts of decline were attributed to customers moving to Office 365, which falls under D&C Other.

D&C Computing and Gaming Hardware had a strong quarter, up 44% to $1.93 billion in revenue. Surface has continued its strong growth, with revenue of $888 million, which is up 117% year-over-year. For FY 2015, Surface had $3.6 billion in revenue, up 65% from FY 2014. Xbox sales also grew 30% to 1.4 million units (this is Xbox One and Xbox 360) which is good growth, but they still have some work to do in order to get close to the PlayStation 4 numbers. Overall the D&C hardware side has made some big gains, with a gross margin of $435 million for the quarter, up 2316.7% from Q4 2014’s $18 million.

D&C Phone Hardware had more than 10% growth in Lumia sales, with 8.4 million Lumia handsets sold. The bad news is that revenue declined with the majority of the sales being in lower price point devices. That is hardly a surprise though since they have not released anything close to a high price point device in well over a year now. Microsoft is still selling Nokia feature phones, and somehow they still sold almost 20 million of those. Revenue was down 38% year-over-year to $1.23 billion, and gross margin for this division had a loss of $104 million, compared $54 million in the black a year ago. Losing money on every phone sold is not a great way of doing business, so you can certainly see why Satya Nadella make the decision to write down this acquisition and focus on less, but hopefully better, devices.

D&C Other is Microsoft’s consumer facing cloud services. This includes Bing, online advertising, Xbox Live, Office 365 Home and Personal, and first-party games. For Q4, this segment had $2.3 billion in revenue, up 31% from Q4 2014. Xbox Live sales grew 58%, online advertising revenue was up 21%, Bing US market share was up 110 basis points to 20.3%, first-party games was up 62% (mostly Minecraft), and Office 365 Consumer added almost three million customers in Q4, and is now up to 15.2 million. For the full FY 2015, Office 365 Consumer was up almost ten million subscribers. Gross margin for the division was 26% or $594 million, which is up 104% from Q4 2014.

The remainder of Microsoft’s earnings is from the Commercial segments, where they have historically made the bulk of their income with the higher margins of enterprise. For the quarter, commercial revenue was up just slightly to $13.53 billion, compared to $13.50 billion a year ago. Gross margin was down 1% to $10.88 billion. Commercial licensing revenue was down 7% for the quarter, with Office commercial down 18% due to customers moving to Office 365. Windows volume licensing revenue was down 8%, and server revenue was flat. Dynamics ERP customer adds grew 35% in the quarter. The Commercial Other segment includes Office 365 business plans, Azure, Enterprise Mobility and Dynamics CRM Online, and Other revenue grew 36% year-over-year. Commercial Cloud revenue was up 88% and now has an annualized revenue of over $8 billion. Azure revenue and compute usage had a big year, with both growing in the triple digits year-over-year. Microsoft’s CRM Online install base grew almost 250%, and Enterprise mobility added 90% more users, to over 17,000. Microsoft has been transitioning their services and software to the cloud for some time, and they have been seeing steady growth here.

Microsoft Q4 2015 Segment Overview (in Billions USD)
  Q4'2015 Q3'2015 Q4'2014
D&C Licensing Revenue $3.23 $3.48 $4.90
D&C Licensing Gross Margin $2.97 $3.21 $4.52
D&C Computing and Gaming Hardware Revenue $1.93 $1.80 $1.34
D&C Computing and Gaming Hardware Gross Margin $0.44 $0.41 $0.02
Phone Hardware Revenue $1.23 $1.40 $1.98
Phone Hardware Gross Margin -$0.104 -$0.061 $0.054
D&C Other Revenue $2.30 $2.28 $1.76
D&C Other Gross Margin $0.59 $0.57 $0.29
Commercial Revenue $13.53 $12.80 $13.50
Commercial Gross Margin $10.88 $10.42 $10.99

Obviously it is a bit of a mixed bag for Q4 2015, and really for all of FY 2015, with the $8 billion or so write down of the Nokia acquisition. Microsoft posted Non-GAAP results to account for this, and without that huge hit, operating income would have been $6.4 billion. Microsoft returned $6.7 billion to shareholders, which is up 96%, with $4.2 billion of that being share repurchases and $2.5 billion paid out in dividends.

With Windows 10 right around the corner, we’ll have to see if that can help out on the D&C revenue which has been taking a beating with the reduction in sales of new PCs. With the free upgrade though, this may not make an impact immediately (if at all) so FY 2016 should be an interesting one to watch.

Source: Microsoft Investor Relations

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  • p1esk - Tuesday, July 21, 2015 - link

    Was MS buying Nokia a dumb idea? If yes, how did they justify it at the time? Reply
  • kyuu - Tuesday, July 21, 2015 - link

    The 8 billion write-off won't mean much over the long term. Its more important if their new strategy pays off. Reply
  • Tams80 - Tuesday, July 21, 2015 - link

    Well they have a change in CEO and a complete change in strategy. Nadella is really just cleaning up after Ballmer. Reply
  • WorldWithoutMadness - Wednesday, July 22, 2015 - link

    We will see if continuum is just typical MS execution or a game changer. I am betting on the previous. Reply
  • victorson - Wednesday, July 22, 2015 - link

    Depends on how you look at it. Steve Ballmer seemed committed to Windows Phone much more than Satya Nadella is now, and Nokia had been trying to negotiate the sale for quite a while with no success. Then, after it became clear that Stephen Elop is not capable of running the company properly, we saw a brilliant decision by Nokia (allegedly designed by Finns to push the Microsoft deal) - it started making Android-based devices under the Nokia X brand. This gave a good scare to Ballmer, as losing Nokia practically meant losing all prospects for Windows Phone, and he proceeded with the acquisition. Fortunately or unfortunately, Ballmer's plans for Windows Phone never came to fruition, as Satya Nadella was quick to write down the whole thing in less than a year. Yes, it was loss making, but also, this means that Microsoft has largely given up on phones, and one can argue that it should be there to ensure its relevancy in the future. Reply
  • id4andrei - Wednesday, July 22, 2015 - link

    Better to buy Nokia outright for the brand and supply chain than let it go Android and kill WP with it. Reply
  • BMNify - Tuesday, July 21, 2015 - link

    The 8 Billion write down will be nice for tax benefits. Reply
  • Brett Howse - Tuesday, July 21, 2015 - link

    Not really they still had to pay $1.4 billion. Reply
  • kyuu - Tuesday, July 21, 2015 - link

    Yeah, but what would their taxes have been without the write off? Reply
  • ppi - Wednesday, July 22, 2015 - link

    Not sure about US taxes, but generally this kind of write-offs is not tax deductible. Which is why they have to pay some taxes. Reply

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