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Microsoft Cloud strength highlights third quarter results

Commercial cloud annualized revenue run rate exceeds $15.2 billion
REDMOND, Wash. — April 27, 2017 — Microsoft Corp. today announced the following results for the quarter ended March 31, 2017:
Revenue was $22.1 billion GAAP, and $23.6 billion non-GAAP
Operating income was $5.6 billion GAAP, and $7.1 billion non-GAAP
Net income was $4.8 billion GAAP, and $5.7 billion non-GAAP
Diluted earnings per share was $0.61 GAAP, and $0.73 non-GAAP
“Our results this quarter reflect the trust customers are placing in the Microsoft Cloud,” said Satya Nadella, chief executive officer at Microsoft. “From large multi-nationals to small and medium businesses to non-profits all over the world, organizations are using Microsoft’s cloud platforms to power their digital transformation.”
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. All growth comparisons relate to the corresponding period in the last fiscal year.
 

Three Months Ended March 31,
 ($ in millions, except per share amounts)
Revenue
Operating Income
Net Income
Diluted Earnings per Share
2016 As Reported (GAAP)
$20,531
$5,283
$3,756
$0.47
  Net Impact from Windows 10 Revenue Deferrals
1,625
1,625
1,282
0.16
2016 As Adjusted (non-GAAP)
$22,156
$6,908
$5,038
$0.63
2017 As Reported (GAAP)
$22,090
$5,594
$4,801
$0.61
  Net Impact from Windows 10 Revenue Deferrals
1,467
1,467
914
0.12
2017 As Adjusted (non-GAAP)
$23,557
$7,061
$5,715
$0.73
Percentage Change Y/Y (GAAP)
8%
6%
28%
30%
Percentage Change Y/Y (non-GAAP)
6%
2%
13%
16%
Percentage Change Y/Y (non-GAAP) Constant Currency
7%
5%
16%
19%
Microsoft returned $4.6 billion to shareholders in the form of share repurchases and dividends in the third quarter of fiscal year 2017.
“Strong execution and demand for our cloud-based services drove our commercial cloud annualized revenue run rate to more than $15.2 billion,” said Amy Hood, executive vice president and chief financial officer at Microsoft.
Revenue in Productivity and Business Processes was $8.0 billion and increased 22% (up 23% in constant currency), with the following business highlights:
Office commercial products and cloud services revenue increased 7% (up 8% in constant currency) driven by Office 365 commercial revenue growth of 45% (up 45% in constant currency)
Office consumer products and cloud services revenue increased 15% (up 14% in constant currency) and Office 365 consumer subscribers increased to 26.2 million
Dynamics products and cloud services revenue increased 10% (up 11% in constant currency) driven by Dynamics 365 revenue growth of 81% (up 82% in constant currency)
LinkedIn contributed revenue of $975 million
Revenue in Intelligent Cloud was $6.8 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 93% (up 94% in constant currency)
Enterprise Services revenue decreased 1% (unchanged in constant currency) with declines in custom support agreements offset by growth in Premier Support Services and consulting
Revenue in More Personal Computing was $8.8 billion and decreased 7% (down 7% in constant currency) driven primarily by lower phone revenue, with the following business highlights:
Windows OEM revenue increased 5% (up 5% in constant currency)
Windows commercial products and cloud services revenue increased 6% (up 6% in constant currency)
Surface revenue decreased 26% (down 25% in constant currency)
Search advertising revenue excluding traffic acquisition costs increased 8% (up 9% in constant currency)
Gaming revenue increased 4% (up 6% in constant currency)
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 April 27, 2018.
“As Adjusted” Financial Results and non-GAAP Measures
During the third quarter of fiscal years 2017 and 2016, GAAP revenue, operating income, net income, and diluted earnings per share include the net impact from Windows 10 revenue deferrals. This item is 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 $1.5 billion during the third quarter of fiscal year 2017 and net revenue deferrals of $1.6 billion during the third quarter of fiscal year 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. Additional information regarding the new revenue standard is provided in the “Recent Accounting Guidance Not Yet Adopted” section of Microsoft’s Form 10-Q for the quarter ended March 31, 2017 (Notes to Financial Statements). 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.
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. The non-GAAP financial measures presented below 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.
Financial Performance Constant Currency Reconciliation

Three Months Ended March 31,
 ($ in millions, except per share amounts)
Revenue
Operating Income
Net Income
Diluted Earnings per Share
2016 As Reported (GAAP)
$20,531
$5,283
$3,756
$0.47
2016 As Adjusted (non-GAAP)
$22,156
$6,908
$5,038
$0.63
2017 As Reported (GAAP)
$22,090
$5,594
$4,801
$0.61
2017 As Adjusted (non-GAAP)
$23,557
$7,061
$5,715
$0.73
Percentage Change Y/Y (GAAP)
8%
6%
28%
30%
Percentage Change Y/Y (non-GAAP)
6%
2%
13%
16%
Constant Currency Impact
$(222)
$(181)
$(153)
$(0.02)
Percentage Change Y/Y (non-GAAP) Constant Currency
7%
5%
16%
19%
Segment Revenue Constant Currency Reconciliation

Three Months Ended March 31,
 ($ in millions)
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
2016 As Reported (GAAP)
$6,521
$6,096
$9,539
2017 As Reported (GAAP)
$7,958
$6,763
$8,836
Percentage Change Y/Y (GAAP)
22%
11%
(7)%
Constant Currency Impact
$(82)
$(74)
$(67)
Percentage Change Y/Y (non-GAAP) Constant Currency
23%
12%
(7)%
Selected Product and Service Revenue Constant Currency Reconciliation       

Three Months Ended March 31,

Percentage Change Y/Y (GAAP)
Constant Currency Impact
Percentage Change Y/Y (non-GAAP) Constant Currency
Office commercial products and cloud services
7%
1%
8%
Office 365 commercial
45%
0%
45%
Office consumer products and cloud services
15%
(1)%
14%
Dynamics products and cloud services
10%
1%
11%
Dynamics 365
81%
1%
82%
Server products and cloud services
15%
1%
16%
Azure
93%
1%
94%
Enterprise Services
(1)%
1%
0%
Windows OEM
5%
0%
5%
Windows commercial products and cloud services
6%
0%
6%
Surface
(26)%
1%
(25)%
Search advertising excluding traffic acquisition costs
8%
1%
9%
Gaming
4%
2%
6%

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.
About Microsoft
Microsoft (Nasdaq “MSFT” @microsoft) is the leading platform and productivity company for the mobile-first, cloud-first world and its mission is to empower every person and every organization on the planet to achieve more.
Forward-Looking Statements
Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as:
intense competition in all of Microsoft’s markets;
increasing focus on services presents execution and competitive risks;
significant investments in new products and services that may not be profitable;
acquisitions, joint ventures, and strategic alliances may have an adverse effect on our business;
impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;
Microsoft’s continued ability to protect and earn revenues from its intellectual property rights;
claims that Microsoft has infringed the intellectual property rights of others;
the possibility of unauthorized disclosure of significant portions of Microsoft’s source code;
cyber-attacks and security vulnerabilities in Microsoft products and services that could reduce revenue or lead to liability;
disclosure of personal data that could cause liability and harm to Microsoft’s reputation;
outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;
government litigation and regulation that may limit how Microsoft designs and markets its products;
potential liability under trade protection and anti-corruption laws resulting from our international operations;
laws and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims, or fines against us;
Microsoft’s ability to attract and retain talented employees;
adverse results in legal disputes;
unanticipated tax liabilities;
Microsoft’s hardware and software products may experience quality or supply problems;
exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange;
catastrophic events or geo-political conditions may disrupt our business; and
adverse economic or market conditions may harm our business.
For more information about risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft’s Investor Relations department at (800) 285-7772 or at Microsoft’s Investor Relations website at http://www.microsoft.com/en-us/investor.
All information in this release is as of April 27, 2017. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.
Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news. Web links, telephone numbers, and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today’s 2:30 p.m. Pacific time conference call with investors and analysts, is available at http://www.microsoft.com/en-us/investor.
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Ensuring equal pay for equal work

MS-Execs-2014-11-Hogan-Kathleen-397-2-800x1200One of the most important aspects of our evolving culture at Microsoft is our deep commitment to building a more diverse and inclusive workforce. If we want to build products and services for everyone on the planet, we need to represent everyone on the planet. Having a diverse and inclusive workforce is indeed a powerful bridge to the markets and people we serve.

A year and a half ago, our CEO, Satya Nadella, set out three areas of focus for Diversity & Inclusion at Microsoft: recruiting more diverse talent; expanding training to foster a more diverse and inclusive culture; and ensuring equal pay and equal opportunity. At that time, for every $1 earned by men, our female employees in the U.S. earned 99.7 cents at the same job title and level.

With that as a backdrop and in recognition of April 12 as National Equal Pay Day (which originated in 1996 as a public awareness event to illustrate the gap between men’s and women’s wages), I wanted to share our most recent data, not only for women, but also for racial and ethnic minorities in the U.S.:

image1 image2
Today, for every $1 earned by men, our female employees in the U.S. earn 99.8 cents at the same job title and level. Racial and ethnic minorities in the U.S. combined earn $1.004 for every $1 earned by their Caucasian counterparts. Breaking it down even further, African American/black employees are at $1.003; Hispanic/Latino(a) employees are at 99.9 cents; and Asian employees are at $1.006 for every $1 earned by Caucasian employees at the same job title and level, respectively.

These numbers reflect our commitment to equal pay for equal work, and I’m encouraged by these results. We will continue our commitment to equal pay by monitoring this data and publicly disclosing it as part of our annual public diversity and inclusion information and data reporting. We will also continue work to ensure that all of our employees have equal opportunity.

Our announcement today is another step forward along the path of greater diversity and inclusion progress at Microsoft, and in society as a whole. Along with our industry peers, the mission of landing intentional, enduring and impactful diversity and inclusion initiatives is one will we continue to pursue vigilantly.

The post Ensuring equal pay for equal work appeared first on The Official Microsoft Blog.

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Microsoft Envision: A conversation on digital transformation

Yesterday marked the first day of what we hope will be a long tradition. Our new flagship event for business leaders — the Microsoft Envision conference — kicked off in New Orleans with a keynote from Satya Nadella and a guest appearance from astronaut Captain Scott Kelly. The topic of digital transformation was the red thread that connected the keynote, the drill-down sessions and conversations on-and-off the expo floor.

With Microsoft Envision, we’re creating a truly global summit for issues critical to CxOs and other business leaders. More than 6,000 leaders from 70 countries representing every walk of industry are here in New Orleans. We’ve moved some of our deeply technical content to Microsoft Ignite and Microsoft Build so attendees here can focus on challenges, trends and disruptors that are making and breaking companies today. This conference is designed to give everyone a chance to step back and learn about smart strategies to tackle emerging issues, power new efficiencies and build new business models and revenue streams.

We’ve convened one of the more impressive slates of speakers I can remember. There are sessions with top leaders like Paypal CEO Dan Schulman, NFL CIO Michelle McKenna-Doyle and Special Olympics Chairman Timothy P. Shriver, Ph.D.—all of whom are sharing their perspective and career lessons on transforming for success. I even got the chance to sit down with Captain Kelly, who shared his experiences with Microsoft HoloLens in Redmond, Washington, and on the International Space Station. He talked about the future opportunity for HoloLens to create better connection with astronauts in space and on the ground resources.

Digital Transformation

Yesterday Satya discussed the benefits of digital transformation in business. He shared stories about amazing companies doing incredible things with technology. He discussed how Virgin Atlantic is deepening its relationship with customers by using analytics to get a 360-degree view of a customer and turn those insights into predictive power to deliver personalization at scale.  He also talked about how Ecolabs, a $14 billion global provider of water, hygiene and energy technologies and services, is using a combination of sensors and data to predict the flow of business and automate decisions.

Illustrating the scale of disruption we’re seeing today, Satya announced that Microsoft and R3 (a consortium of 40+ banks around the world) have formed a partnership to help accelerate the implementation of distributed ledger, blockchain technology—a big step in modernizing the way financial institutions conduct transactions. He also shared that Toyota is partnering with Microsoft to bring cloud intelligence into the driving experience.

In planning this new conference, we wanted it to be a place that would foster the free exchange of ideas, build a strong community and bring together leaders in business to learn from each other. So far I have been impressed by the conversations and stories I’ve heard of customers, speakers and analysts at different stages of their digital transformation.

The expo floor has also been impressive, with hundreds of booths from Microsoft and its partners, more than 100 Microsoft Theater Trend sessions, and 300-plus customer and partner meetings.

I’m looking forward to an exciting day two. As Satya said in his keynote, we want attendees to envision what a difference they can make for their customers, and how technology can be used to change the world. We feel like we have a responsibility to bring together different industries and leaders, because technology is transforming every industry.

Follow more stories on today’s digital transformation on our new business blog.

The post Microsoft Envision: A conversation on digital transformation appeared first on The Official Microsoft Blog.

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At Microsoft Envision, the financial services blockchain revolution begins

At Monday’s kickoff to Microsoft Envision in New Orleans, Peggy Johnson, executive vice president for Business Development at Microsoft, announced a strategic partnership with R3, a consortium of leading banking institutions, to help move blockchain technology from hype to reality for the financial services industry.

“Together, we will help R3’s over 40 member banks develop, test and deploy blockchain technologies to modernize decades-old processes and streamline operations, potentially saving billions of dollars from back-office operations,” she writes on the Transform business blog. “Digital transformation is lighting up across industries in every region of the world. It brings with it new challenges and new opportunities, opens up new markets and new customers, and demands a fundamentally new approach to thrive in a mobile-first, cloud-first world.

“One undeniable force in this transformation is the emerging use of blockchain technology in the enterprise,” Johnson continues. “Known by many as the backbone of bitcoin, blockchain offers a secure and transparent way to digitally track the ownership of assets. Simply put, it promises to revolutionize the way financial institutions conduct transactions.”

Read more about how blockchain modernizes legacy financial processes and eliminates the need for middlemen on the Transform business blog.

Athima Chansanchai
Microsoft News Center Staff

The post At Microsoft Envision, the financial services blockchain revolution begins appeared first on The Official Microsoft Blog.

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Toyota and Microsoft team up to connect drivers to the future

Toyota announced on Monday that it’s creating a new company called Toyota Connected to serve as the carmaker’s data science hub as it seeks to connect cars to people’s daily lives. Microsoft Azure will be the cloud computing platform, providing a hybrid solution for everything Toyota Connected creates as it works to make driving more personal, more intuitive and safer.

“We’ve all been talking about big data for a long time, but we are at a unique point in history where the technology is catching up with what we hope to achieve by delivering new services and capabilities into the vehicle,” said Zack Hicks, president and chief executive officer of Toyota Connected.

With the new venture, Toyota and Microsoft envision a world where cars are giant smartphones you ride in, with a virtual assistant that knows the best routes, whom to notify if traffic will make you late for a meeting, what your blood pressure is doing during stop-and-go, and which restaurants at the next exit might be most to your liking.

Read more at the Transform blog.

Vanessa Ho
Microsoft News Center Staff

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Ecolab and Microsoft work together to face water shortage challenges

Water is vital to life, but it’s a finite resource – 97.5 percent of it is salt water. The 2.5 percent that is fresh comes from glaciers, ice caps, groundwater, lakes, rivers, ice and snow. Your morning cup of coffee takes 55 gallons of water to produce, the shirt you’re wearing commanded another 700 gallons of water to produce, and the car you drive to work requires a staggering 39,090 gallons to build.

The demand for water has risen alongside population growth, urbanization, changing diets, rising demand for energy and increasing industrialization. Recent events such as the California drought are currently keeping water management in the public spotlight. Personal conservation – not watering lawns and taking shorter showers – is a start. But it’s only part of the solution.

Ecolab, a $14 billion company that is a leading global provider of water, hygiene and energy technologies and services, has partnered with Microsoft to use recent and future developments in cloud computing, applying cutting-edge technology to speed up how worldwide industries tackle water scarcity.

Read what they’re doing on the Transform business blog.

Athima Chansanchai
Microsoft News Center Staff

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