Microsoft’s (MSFT) CEO Satya Nadella on Q4 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

Microsoft Corporation (NASDAQ:MSFT)

Q4 2014 Earnings Conference Call

July 22, 2014 5:30 PM ET

Executives

Chris Suh – General Manager, IR

Amy Hood – EVP and CFO

Satya Nadella – CEO

Analysts

Mark Moerdler – Sanford Bernstein

Brent Thill – UBS

Keith Weiss – Morgan Stanley

Phil Winslow – Credit Suisse

Rick Sherlund – Nomura

Walter Pritchard – Citigroup

Heather Bellini – Goldman Sachs

Ed Maguire – CLSA

Karl Keirstead – Deutsche Bank

Jim Moore – FBR Capital

Brad Reback – Stifel

Operator

Greetings and welcome to Microsoft’s Fourth Quarter Fiscal Year 2014 Earnings. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Chris Suh, General Manager, Investor Relations for Microsoft. Thank you, Chris. You may begin.

Chris Suh

Thank you, Roya. Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel.

On our website, microsoft.com/investor, we have posted a slide deck which provides summary of our financial results, a reconciliation of differences between GAAP and non-GAAP financial measures and the table of noted items to aid in understanding our results this quarter. Additionally, the slide deck contains detailed information regarding the impact of the Nokia devices and services acquisition on our financial results. Our press release is also on the website and includes an addendum with additional information about our fourth quarter performance.

Microsoft is reporting the financial performance and acquired Nokia devices and services business in a new segment called Phone Hardware. Additionally, the devices and consumer hardware segment was renamed the Computing and Gaming Hardware. The products included in this renamed segment remain the same.

Current year information reflects the financial performance of the acquired business beginning on April 25, 2014. Any reference to operating expense includes research and development, sales and marketing and general and administrative, but excludes integration and restructuring charges.

Please keep in mind that all growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise specified all impacted numbers have been adjusted for non-GAAP and noted items which are detailed in our press release in slide deck. We will post the 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 in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website, until July 22, 2015.

During this call, we will be making forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ, because of factors discussed in today’s earnings press release and the comments made during this conference call and in the risk factor section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

And with that, I’ll turn the call over to Amy.

Amy Hood

Thanks Chris, and good afternoon everyone. This month is an important time for Microsoft, as the leadership team we’re taking bold and decisive action to evolve our organization and culture. This includes difficult steps, but they are necessary to position Microsoft for future growth and industry leadership. Today, we’ll spend more time talking about the significant changes we’re driving. However, let me first start with this quarter’s results, after that Satya will talk more about our past forward and then I’ll share our financial outlook before we take your questions.

As I think about our strong execution this quarter, there are three things that stand out to me, significant momentum with our cloud services, progress in a number of our consumer businesses and continued cost discipline.

Our total fourth quarter revenue was $23 billion including $2 billion from the phone hardware segment. As you know our Q4 guidance did not include the impact of the acquisition of Nokia’s devices and services business. Excluding that we grew revenue 10% exceeding the high-end of our guidance range.

Moving on to earnings per share. Before the impact of the acquisition and the noted items Chris highlighted earlier EPS grew 12% to $0.66. These details can be found in the earnings slide deck on our Investor Relations website. Geographically, performance was strong across most markets, particularly in North America and in Europe. We did, however, see challenging conditions in China or like many other multinationals we’re experiencing a weak business environment which we do not expect to change in the near term.

Our commercial cloud revenue grew 147% this quarter, driven by both Office 365 and Azure. Our commercial cloud annual revenue run rate more than doubled this year and now exceeds $4.4 billion and with this rapidly growing scale we continue to expand our cloud gross margins.

We saw strong commercial C growth across Office 365 particularly with SMB customers. Additionally, we added over 1 million new subscribers to Office 365, Home and Personal and we ended the quarter with 5.6 million users. Azure has also grown dramatically, the storage doubling and compute tripling this year.

Along with increased usage of our core services, over 50% of our Azure customers are now also using higher value services like the enterprise mobility suite, which are seeing strong adoption since the May launch. We’re pleased that our customers are enthusiastically embracing Office 365, Azure, CRM Online and our other cloud services, especially considering it’s still early in the cloud transition.

Each customer has unique deployment needs and as a result CIOs value the flexibility that our hybrid cloud offerings provide. You can see this in our commercial bookings, which grew 23% this quarter and our contracted not billed balance now exceeds $24 billion. As we previously discussed in fiscal year 2014 both the quarter and the year presented a large renewal opportunity are differentiated value proposition combined with strong execution kept our renewal rates very high.

In addition to transitioning to the cloud, our customers continue to invest in premium versions of our on-prem server products like Window Server, System Center and SQL Server. As a result, our server licensing revenue grew 14% this quarter. We feel good about the progress we’re making with Windows. Developed markets continue to show stability and we’re encouraged by the initial response from OEMs to our new consumer offerings like Windows with Bing.

This quarter OEM revenue grew 3% as we saw the commercial hardware refresh cycle continue with businesses updating our devices and renewing their commitment to the Windows platform. XP end of support contributed to the double-digit growth in both Windows Pro and volume licensing, though the benefits moderated throughout the quarter.

In Bing, we continue to see growth in both usage and monetization. This quarter U.S. search query share exceeded 19% and RPS grew double-digits again. As we saw in prior quarters, display revenue remains soft. In late June, we launched Surface Pro 3. While it’s still early sales are outpacing earlier versions of Surface Pro and we are excited to bring the device to many more markets this summer.

During the quarter, we reassessed our product roadmap and decided not to ship a new form factor that was under development. Combined with the transition of production to our latest Surface offering, we made inventory adjustments which impacted our gross margins.

Also in June, we released our new Xbox One offering and we’re pleased with the response. Adding three, we reasserted our focus on games, the blockbuster titles and key exclusive coming this holiday. With the progress we are making in channel inventories, the new market for Xbox One and our exciting game line up, we feel well-positioned heading into the holiday season.

With the closing of the Nokia devices and services acquisition during the quarter, we established a new segment Phone Hardware to provide transparency into the progress we’ll make as we improve and grow the phone business. This quarter, Lumia device sales were primarily driven by good performance in the lower price point 500 and 600 series.