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

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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