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MICROSOFT CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – Marketscreener.com

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Note About Forward-Looking Statements
Highlights from the third quarter of fiscal year 2022 compared with the third quarter of fiscal year 2021 included:
• Microsoft Cloud (formerly commercial cloud) revenue increased 32% to $23.4
billion.
• Office Commercial products and cloud services revenue increased 12% driven
by Office 365 Commercial growth of 17%.
• Office Consumer products and cloud services revenue increased 11% and
• Server products and cloud services revenue increased 29% driven by Azure
and other cloud services growth of 46%.
• Windows original equipment manufacturer licensing (“Windows OEM”) revenue
Industry Trends
Economic Conditions, Challenges, and Risks
Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) for a discussion of these factors and other risks.
COVID-19
Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.
Reportable Segments
Additional information on our reportable segments is contained in Note 17 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Metrics
Commercial
Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise Services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.
Productivity and Business Processes and Intelligent Cloud
Office Commercial products and cloud services revenue growth Revenue from Office Commercial products and
services (Office 365 subscriptions, the
portion of Microsoft 365 Commercial
subscriptions, and Office licensed on-premises),
Office, Exchange, SharePoint,
Teams, Office 365 Security and
and Skype for Business
Office Consumer products and cloud services revenue growth Revenue from Office Consumer products and cloud
including Microsoft 365 Consumer
subscriptions, Office licensed on-premises, and
services
of Office 365 Commercial seats at end
where seats are paid users covered by
365 Commercial subscription
of Microsoft 365 Consumer subscribers
period
Dynamics products and cloud
including Dynamics 365, comprising a
intelligent, cloud-based applications
CRM, Customer Insights, Power Apps,
Automate; and on-premises ERP and CRM
Marketing Solutions, Premium
Subscriptions, Sales Solutions, and Learning
Server products and cloud services,
Azure and other cloud services; SQL
Windows Server, Visual Studio, System
related Client Access Licenses
from sales of Windows Pro and non-Pro
sold through the OEM channel
Windows Commercial products and cloud services revenue growth Revenue from Windows Commercial products and
services, comprising volume licensing of
operating system, Windows cloud
and other Windows commercial offerings
from Surface devices and accessories
from Xbox content and services,
digital transactions, Xbox Game Pass
Search and news advertising revenue, excluding TAC, growth Revenue from search and news advertising
traffic acquisition costs (“TAC”) paid
network publishers and news partners
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Cost of revenue increased $2.6 billion or 20% driven by growth in Microsoft Cloud.
Gross margin increased $5.1 billion or 18% driven by growth across each of our segments.
• Microsoft Cloud gross margin percentage decreased slightly to 70%.
Excluding the impact of the change in accounting estimate, Microsoft Cloud
Operating expenses increased $1.8 billion or 15% driven by investments in cloud engineering, LinkedIn, and commercial sales.
Key changes in operating expenses were:
• Research and development expenses increased $1.1 billion or 21% driven by
investments in commercial sales and LinkedIn. Sales and marketing included
a favorable foreign currency impact of 3%.
• General and administrative expenses increased $153 million or 12% driven
by investments in corporate functions. General and administrative included
a favorable foreign currency impact of 2%.
Operating income increased $3.3 billion or 19% driven by growth across each of our segments.
Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 3%, 3%, and 4%, respectively. Operating expenses included a favorable foreign currency impact of 2%.
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
Cost of revenue increased $8.0 billion or 21% driven by growth in Microsoft Cloud.
Gross margin increased $16.5 billion or 20% driven by growth across each of our segments.
• Microsoft Cloud gross margin percentage decreased slightly to 70%.
Excluding the impact of the change in accounting estimate, Microsoft Cloud
Operating expenses increased $4.5 billion or 14% driven by investments in cloud engineering, LinkedIn, Gaming, and commercial sales.
Key changes in operating expenses were:
• Research and development expenses increased $2.6 billion or 18% driven by
• General and administrative expenses increased $566 million or 16% driven
by investments in corporate functions.
Operating income increased $12.0 billion or 24% driven by growth across each of our segments.
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Productivity and Business Processes
Revenue increased $2.2 billion or 17%.
Commercial products revenue declined 28% driven by continued customer
shift to cloud offerings.
• Office Consumer products and cloud services revenue increased $150 million
or 11% driven by Microsoft 365 Consumer subscription revenue. Microsoft
Operating income increased $1.2 billion or 19%.
• Gross margin increased $1.7 billion or 16% driven by growth in Office 365
Commercial and LinkedIn. Gross margin percentage was relatively unchanged.
• Operating expenses increased $565 million or 13% driven by investments in
LinkedIn and cloud engineering.
Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 2%, 3%, and 4%, respectively.
Intelligent Cloud
Revenue increased $3.9 billion or 26%.
• Server products and cloud services revenue increased $3.8 billion or 29%
driven by Azure and other cloud services. Azure and other cloud services
revenue grew 46% driven by growth in our consumption-based services.
Server products revenue increased 5% driven by hybrid solutions, including
Windows Server and SQL Server running in multi-cloud environments.
• Enterprise Services revenue increased $88 million or 5% driven by growth
in Enterprise Support Services.
Operating income increased $1.9 billion or 29%.
• Gross margin increased $2.6 billion or 24% driven by growth in Azure and
other cloud services. Gross margin percentage decreased. Excluding the
impact of the change in accounting estimate, gross margin percentage
increased 1 point driven by improvement in Azure and other cloud services,
offset in part by sales mix shift to Azure and other cloud services.
• Operating expenses increased $753 million or 17% driven by investments in
Azure and other cloud services.
Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 3%, 3%, and 4%, respectively. Operating expenses included a favorable foreign currency impact of 2%.
More Personal Computing
Revenue increased $1.5 billion or 11%.
• Windows revenue increased $614 million or 11% driven by growth in Windows
OEM and Windows Commercial. Windows OEM revenue increased 11% driven by
continued strength in the commercial PC market, which has higher revenue
• Search and news advertising revenue increased $544 million or 23%. Search
and news advertising revenue excluding traffic acquisition costs increased
23% driven by higher revenue per search and search volume.
comparable that benefited from Xbox Series X|S launches, driven by growth
in Xbox content and services and Xbox Hardware. Xbox content and services
revenue increased 4% driven by growth in Xbox Game Pass subscriptions and
first-party titles, offset in part by a decline in third-party titles.
Xbox hardware revenue increased 14% due to continued demand for Xbox
Operating income increased $305 million or 7%.
• Gross margin increased $755 million or 10% driven by growth in Windows and
Search and news advertising. Gross margin percentage decreased slightly.
• Operating expenses increased $450 million or 17% driven by investments in
Gaming, Search and news advertising, and Windows marketing.
Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 2%, 3%, and 3%, respectively.
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
Productivity and Business Processes
Revenue increased $7.5 billion or 19%.
Commercial products revenue declined 19% driven by continued customer
• Office Consumer products and cloud services revenue increased $505 million
or 12% driven by Microsoft 365 Consumer subscription revenue.
• Dynamics products and cloud services revenue increased 27% driven by
Dynamics 365 growth of 42%.
Operating income increased $4.5 billion or 25%.
• Gross margin increased $5.9 billion or 19% driven by growth in Office 365
Commercial and LinkedIn. Gross margin percentage was relatively unchanged.
• Operating expenses increased $1.4 billion or 11% driven by investments in
cloud engineering and LinkedIn.
Intelligent Cloud
Revenue increased $11.6 billion or 27%.
• Server products and cloud services revenue increased $11.4 billion or 31%
driven by Azure and other cloud services. Azure and other cloud services
revenue grew 47% driven by growth in our consumption-based services.
Server products revenue increased 8% driven by hybrid solutions, including
Windows Server and SQL Server running in multi-cloud environments.
• Enterprise Services revenue increased $370 million or 7% driven by growth
in Enterprise Support Services and Microsoft Consulting Services.
Operating income increased $5.7 billion or 31%.
• Gross margin increased $7.5 billion or 24% driven by growth in Azure and
other cloud services. Gross margin percentage decreased. Excluding the
impact of the change in accounting estimate, gross margin percentage
increased 1 point driven by improvement in Azure and other cloud services,
offset in part by sales mix shift to Azure and other cloud services.
• Operating expenses increased $1.8 billion or 15% driven by investments in
Azure and other cloud services.
Revenue increased $5.3 billion or 13%.
• Windows revenue increased $2.2 billion or 14% driven by growth in Windows
OEM and Windows Commercial. Windows OEM revenue increased 16% driven by
continued strength in the commercial PC market, which has higher revenue
• Search and news advertising revenue increased $1.9 billion or 29%. Search
and news advertising revenue excluding traffic acquisition costs increased
31% driven by higher revenue per search.
• Gaming revenue increased $1.1 billion or 10% on a strong prior year
comparable that benefited from Xbox Series X|S launches and stay-at-home
scenarios, driven by growth in Xbox hardware and Xbox content and
services. Xbox hardware revenue increased 25% due to continued demand for
Xbox Series X|S. Xbox content and services revenue increased 6% driven by
growth in first-party titles and Xbox Game Pass subscriptions, offset in
Operating income increased $1.8 billion or 12%.
• Gross margin increased $3.0 billion or 14% driven by growth in Windows and
Search and news advertising. Gross margin percentage increased slightly
driven by sales mix shift to higher margin businesses and improvement in
Search and news advertising.
• Operating expenses increased $1.3 billion or 16% driven by investments in
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content.
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Research and development expenses increased $1.1 billion or 21% driven by investments in cloud engineering.
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
Research and development expenses increased $2.6 billion or 18% driven by investments in cloud engineering and Gaming.
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Sales and marketing expenses increased $513 million or 10% driven by investments in commercial sales and LinkedIn. Sales and marketing included a favorable foreign currency impact of 3%.
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
Sales and marketing expenses increased $1.3 billion or 9% driven by investments in commercial sales, LinkedIn, and Windows marketing.
General and Administrative
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
General and administrative expenses increased $153 million or 12% driven by investments in corporate functions. General and administrative included a favorable foreign currency impact of 2%.
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
General and administrative expenses increased $566 million or 16% driven by investments in corporate functions.
The components of other income (expense), net were as follows:
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Nine Months Ended March 31, 2022 Compared with Nine Months Ended March 31, 2021
The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:
Cash, Cash Equivalents, and Investments
Valuation
Cash Flows
Debt
The following table outlines the expected future recognition of unearned revenue as of March 31, 2022:
If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable.
Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.
Off-Balance Sheet Arrangements
Other Planned Uses of Capital
Liquidity
Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.
Revenue Recognition
Impairment of Investment Securities
Research and Development Costs
Legal and Other Contingencies
Income Taxes
© Edgar Online, source Glimpses

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