Microsoft Hits All Time High After Beating Estimates Thanks To Windows 10 "Revenue Deferral"

Tyler Durden's picture

Microsoft shares just traded $60.00 for the first time in history, reaching record highs after smashing earnings expectations thanks to "the cloud."

  • *MICROSOFT 1Q ADJ REV. $22.3B, EST. $21.7B; ADJ EPS BEATS EST.
  • *MICROSOFT 1Q ADJ EPS 76C, EST. 68C

“Our first quarter results showed continued demand for our cloud-based services," said Amy Hood, executive vice president and chief financial officer at Microsoft. “We continue to invest, position ourselves for long-term growth, and execute well across our businesses.”

  • Revenue in Intelligent Cloud grew 8% (up 10% in constant currency) to $6.4 billion.
  • Revenue in Productivity and Business Processes grew 6% (up 8% in constant currency) to $6.7 billion.
  • Revenue in More Personal Computing declined 2% (down 1% in constant currency) to $9.3 billion.

However, there is a catch, and as always it is in the distinction between GAAP and non-GAAP, because while MSFT reported a 2% drop in GAAP Q1 EPS from $0.61 to $0.60, the same metric on a non-GAAP basis rose by 13% from $0.70 to $0.76.

Why the difference? Becuase Microsoft is merely the latest company to use not only non-GAAP EPS but also non-GAAP revenue, and in fact in Q1 2016 the difference of nearly $2 billion: GAAP revenue of $20.453BN vs non-GAAP revenue of $22.334 billion.

Where did this massive non-GAAP difference come from? Something called Windows 10 Revenue Deferral. This is how MSFT explained it:

Net Impact from Windows 10 Revenue Deferrals. Microsoft recorded net revenue deferrals of $1.9 billion during the three months ended September 30, 2016 and net revenue deferrals of $1.3 billion during the three months ended September 30, 2015, 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 below. 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., ratable, rather than at the time of billing.

Oh, and speaking of actual, real, GAAP profit, MSFT's gross profit margin slid from 64.6% to 61.6% Y/Y in Q1.

* * *

Regardless, the machines love the headline, just as it was intended and smash through stops at historical record highs to $60.00

 

Bloomberg shows MSFT traded $59.9688 on Dec 30th 1999 and s now trading (17 years later) at $60.24...

 

For a return of +0.49% over 17 years...

 

and while we hate to steal the jam from the market's donut, we note that GAAP EPS declined from %0.61 Sept.30, 2015 to $0.60 Sept 20, 2016, but non-GAAP rose from $0.70 to $0.76

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SloMoe's picture

Check out the increase in debt...

Lynx Dogood's picture

It helps that I got sick of there viruses and switched to Linux Mint. Microsoft: the joke that keeps on giving!!!!

And stealing all your information......

MisterMousePotato's picture

I have been accused in the past of oversimplifying things. So, maybe I'm just stupid, but ... does this mean that Microsoft is claiming to have earned money that it has not, in fact, earned? Is this legal? Can I do this at the bank or the grocers?

i'm-confused's picture

so this means crazy Green Day tomorrow & i get killed again staying short overnight, correct'?

Bilderberg Member's picture

MSFT P/E is now 27, Price to cashflow 13.7, Price to sales 5.3, Debt to common equity 74%

Doom Porn Star's picture

"so this means crazy Green Day tomorrow & i get killed again staying short overnight, correct'? "

 

You just had to ask...

Spungo's picture

Sure the GAAP net income dropped, but what about cash flow? It's possible for one to go up while the other goes down. I've seen a lot of this in the real estate market. A REIT will report a net loss for the quarter due to fair value adjustments, but their AFFO (cash flow after straight line rent adjustments) hits a record high.

 

Suppose your house drops in value by $20,000, but you get a raise at your job worth $10,000 per year. That would be a GAAP net loss, but FFO is still up.

pitz's picture

No GAAP doesn't mark assets to market like that. 

And if you get a raise at the job worth $10,000 per year, but you have to add an extra 50 miles per day commute because its downtown, that may not amount to an increase at all on a 'GAAP' basis (depreciation charges on the car, for instance, would accelerate).  Usually GAAP is after-tax.

Spungo's picture

Yes it does. Here's a REIT, looking at Q2 only:
https://www.google.com/finance?q=TSE%3AMR.UN&fstype=ii&ei=K_QJWIDNEKW7iw...
Net Income: (14.12)
Non-Cash Items: 20.98 [mark to market change in book value]
Changes in Working Capital: (1.31)
Cash from Operating Activities: 5.55

Here is a food retailer, looking at the most recent year:
https://www.google.com/finance?q=TSE%3AEMP.A&fstype=ii&ei=BPUJWKnIKaisig...
Net Income: (2114.60)
Depreciation: 384.8
Amortization: 89
Non-Cash Items: 2768.4 [mark to market change in book value]
Changes in Working Capital: (248.8)
Cash from Operating Activities: 896.8

ANestIOS's picture

every cloud has a silver lining:-)

 

(quick everyone, sell your physical silver and buy the cloud)

Doom Porn Star's picture

MSFT has enjoyed a near quadrupling of price off the 2009 low, very much in line with the re-inflation of the broad indices...

MicroZirpt

ANestIOS's picture

so, MS is now worth more than it ever was?

reader2010's picture

borrowing free money at near 0% interest rate to buy back its own stocks did all the tricks. there's nothing new.

Clock Crasher's picture

Zirp junkies aaalll aboooard!

walküre's picture

Makes sense in this Twilight Zone we live in...

Free Windows 10 = ZIRP

Free Upgrades to the Free Windows 10 = NIRP

Eventually they throw in the tablet.

Get it?

Clock Crasher's picture

FANTASY stocks take a good look at MSFT
Its whats in your future (barring hyper-inflation)

Can you say PE compression?

Allen_H's picture

Never Windows10, never windows AGAIN.

Dungeness's picture

After getting Windows 8 with a new Sony Vaio, I switched to an AirMac. Pages and Numbers can open Word and Excel files so the switch was not that hard.

A company as large and profitable as MSFT definitely has resources to test their software before releasing it to the public, but apparently elected not to do that. The product marketing people at MSFT must have gotten use to the idea that whatever they design and market will sell no matter what.

Cash Is King's picture

Here's an idea. Let's stop updating our XP & Vista OS's so we can fist f... the morons who bought them in the first place and make them buy whole new systems with this crappy new W10!

Flounder's picture

I paid nothing to delete my free download of Windows 10 after my elitebook threw up all over it.

ChemtrailPilot's picture

Obviously Microsoft should be at all time highs, they just gave their latest major OS away to millions of consumers for free, this makes perfect sense

EddieLomax's picture

This is the bit that has me confused too, much of the new revenue is supposed to come from suckers paying £80 each and every year for copies of word for windows rather than buying it outright at £140 and using the same old copy for the next 10 years.

Somehow I think they'll find that people never like paying for software if they can help it, and the only thing worse than paying for software is paying for software you do not own.  Not really sure what their plan is for selling software long term.

spanish inquisition's picture

I think they are going to give it away for free and keep booking deferred revenue. Then load it with even more malware so they can sell pictures of you walking around your house to advertising companies, so you can get ads for the kind of underwater you wear.

AGuy's picture

"Obviously Microsoft should be at all time highs, they just gave their latest major OS away to millions of consumers for free, this makes perfect sense"

I am sure they have plans to monitize off the Win 10 upgrades. Probably at some point Win10 switches to a subscription model where you need to pay every month to use it, via credit card or MS-Wallet or some other means. Why else would the force Win7 users to upgrade to Win 10.  I see see a wopper of a class-action lawsuit once they pull the trigger.

 

CatsPaw's picture

A bit different.

The most likely scenario is that windows will bill other companies for access to their OS. This in turn will increase the cost of other software (From adobe to anything you can think of) to the end user.

At the same time, they will block open source and free software that can do the samefor free  for "safety reasons" (You dont really think they got an army of tech specialists who can never make compatibility mode work correctly, right? Nope, they are busy looking at what programs they can screw up) and that will make more money to both Microsoft and the company the originaly bill for access to Windows OS.

Finally, they will release their own store and slowly make it an Apple like eco system where you can only use their stuff.

By the way, this has been done before, just in different areas and at a different scare (like when Windows Vista started blocking programs with execution prevention).

At that point it will be such a monster that 10 billion to spent when the governemnt charges MS with monopoly, fraud and everything else will be nothing problematic (Kinda like VW, or you really think it took the government years to "find out" about the emissions ? Well, if they find out too soon, they cant get a free 6 billion, Kinda like Megaupload).

 

buzzsaw99's picture

Impossible. El-Erian told me to sell. That bastard!

BabaLooey's picture

...and STILL.....their products blow

Just ask Bill Belichick.

https://www.youtube.com/watch?v=wyhjUFcXgo0

TRM's picture

Speaking of cheaters who win ....

robnume's picture

Christ, how I hate Windows 10. Wished I'd never installed the damn thing. Screwed again by Gates, et al.

Solomonpal's picture

What a POS that is. One update used 1/2 of my allocated monthly Internet . Slow too

Duc888's picture

 

 

Do you NEED any WINDOWS SPECIFIC programs?  If not, try Linux Mint.

TRM's picture

Prefer Kubuntu (KDE version) myself.

 

adr's picture

Wait,  so my free upgrade to Windows 10 counted as revenue for Microsoft? The automatic forced upgrades, which are also free,  count as revenue as well? 

If I didn't pay anything for it,  and never intend to,  how does a company record this as money made? 

I guess this is a new world where you don't actually have to sell something to earn money and debt actually counts as profit. 

AGuy's picture

Heres how:

http://www.pcworld.com/article/3094785/windows/yes-windows-10-subscripti...

Monthly subscriptions fees.

Fortunately I disabled patch updates, and I am still on Windows 7, but Unfortunately I need Windows for the work I do.

 

 

trueFacts's picture

Netscape would have put those crying slimebags out of business 20 years ago, if the softies hadnt bought off the US government

JailBanksters's picture

I have to cite bullshit on this, seriously.

We all know Microsh#t have been buying their own stock, with free money.

We all know Windows 10 is the biggest Bomb since Windows Me

We all know Office 365, 2016 is another Bomb of mega proportions.

People are only using Windows 10 because they were forced to when they bought a new 'Puta, and have no Idea how to change it wihout spending even more money for somebody to remove it. And thanks to Intel and if it has Skylake, Kaby Lake Chipset, good look trying to find software. It will only run Windows 10. Nice.

When your in bed with the Chip makers, it's pretty hard for a Monopoly to NOT make money.

And the reason for all this is simple ... Spying.

 

The other intersting statistic is 8 out of 10 'Putas prefer to run anything but Windows 10

 

 

 

AGuy's picture

"We all know Office 365, 2016 is another Bomb of mega proportions."

Unfortunately a lot of Corp America is switching to O365. MS Gives the big discount for first 2 to 3 years and it also reduces their IT head count. It absolutely sucks, but the bean counters looking to cut costs  love O365.

Most of the companies I work with are moving most of thier core operations to the cloud and downsizing IT staff and physical infrastructure. By moving to the cloud they only need a fraction of the IT staff and physical infrastructure. Even server virtuallation is run it s course and companies are downsizing it as services get moved to the cloud.

 

 

JailBanksters's picture

I was fixing something for a company where they keep no client details, no documents, no emails, no accounting, no backups in their office at all.

It's all stored in the cloud somethere. Everything is done via a Web Browser.

Thing is, when the Internet drops out (which is why they contacted me), they can't do anything at all, they are at the mercy of the Internet Provider to fix it sonner than it's possible. They can't even process a clients payment.

 

This is future of Computing that Microsoft is Pushing really really hard for.

 

AGuy's picture

Yes, I know. it also makes them vulnerable to Cyber attackes and breaches. O365 happens to be under a Cyber attack today.

The people making these decisions are the same class that loaded up on dot bomb stocks and the housing bubble. In fact I know some of these people that are pushing for the cloud, got burned badly in the housing bubble. I told them not to buy into the hype and I pointed out the problems (bout in Housing bubble and the "cloud" bubble) but they don't want to hear any of it. But That's OK, I make money when thier grand plan fails and they ask me to pick up the pieces.

 

 

 

 

 

 

 

 

wedderburn's picture

target $100

 

forget the cloud

Blue sky computing

 

current 2.72% yield and measily PE of 28

wwxx's picture

I expect windows10 has those preearnings or non-gaap accounting...to brace themselves legally for the eventual 'yugee' impending lawsuits over windows10 ongoing assault & abuse of the internet bandwidth.

Whacking every voluntary or involuntary user with download [& related uploads--gotta have your skype sharing thing in action yanno], after download of wasted upgrade that only works from windows10's perspective of intentionally diluting the internet's connectivity & usefulness.

40, 80, failures per various program upgradess, per customer, GBytes of BWidth as a harsh indoctrination of knowing the 1511 version & related other programs will fail to install, and 1607 anniversary farce that extends the failures into 80+ downloads of redundant & recurrent failure. [yes 1GB bandwidth, is around $15/GB...the upgrade is 3GB IF it succeed the first time, but after about 40, or 80 failures, the BW is totally & intentionally diluted with microtrash.]

It is nice to know someone is covering the accounting tricks of 0% credit based stock by backs, but wake me when some flipping Attorneys General, get some process started against these management morons known as Microsoft.

wwxx