Next month will be full of quarterly earning reports for many publicly traded companies. Among them will be Microsoft, which will be reporting their earnings for the first quarter of their Fiscal Year 2017 on October 20th.
Investors are sure to pay attention to this earnings report for a few reasons. Since their last earnings report, Microsoft has issued $20 billion in debt, announced a $40 billion buyback of shares, and plans to increase dividends.
But now, Microsoft Investor Relations has announced the company’s upcoming SEC Filings will include a few new metrics. These investor metrics help capture various aspects of the company’s performance beyond what’s on the balance sheet and income statement. Some of these metrics include figures like how much Window’s OEM revenue has grown or how many more subscribers have signed up for Office 365.
Three new investor metrics
The first quarter of Fiscal Year 2017 filing will include a total of 20 investor metrics, three of which are brand new. The newest metrics are Commercial cloud gross margin percentage, Windows Commercial products and cloud services revenue growth, and Gaming revenue.
Commercial cloud gross margin percentage will measure the profitability of Microsoft’s Commerical cloud business. This will give investors insight into the collective profitability of Office 365, Azure, Dynamics Online, and other commercial cloud services.
The next two new investor metrics both fall under Microsoft’s More Personal Computing business. This includes their Windows, Surface, and Xbox businesses. One of the new metrics is Windows Commercial products and cloud services revenue growth. Microsoft says this figure will show how much “all Windows products and services sold through commercial channels” has grown. That will include “Windows Volum Licensing, new Windows cloud services, and other Windows commercial offers aimed at specific customer segments (e.g. Academic).”
Lastly, Microsoft will begin reporting Gaming Revenue. The company defines this as all revenue dollars from “Xbox consoles, Xbox Live service, first party games, and third party game royalties.” This figure should give a clearer picture of how their entire Xbox business is performing, particularly when coupled with Xbox Live active users metric.
So why these metrics now?
These investor metrics certainly help paint a picture of how the company is performing. But just like every company that files earnings reports to the SEC, investor metrics are a selective view of their business unit performance. Results are constructed and chosen by the company itself, and companies always want to put their best foot forward with their financial statements. They also don’t want to give away too much intelligence to their competitors about the inner workings and performance of their divisions.
One notable Microsoft shareholder, former CEO Steve Ballmer, openly criticized the company’s investor metrics, specifically their reporting of cloud revenue. Microsoft has until now liked to boast about the annualized run rate of their cloud revenue. The company has set an ambitious goal to hit $20 billion in annualized cloud revenue. But Ballmer balked at this, noting that just reporting revenue gives no measure of profitability.
It is one thing if revenue is growing incredibly fast. But if costs are growing faster than revenue, or even surpass it in overall terms, then that business most likely isn’t very sustainable. And only reporting the run rate says nothing about how cloud revenue is growing in terms of its costs.
The new ‘Commercial cloud gross margin percentage’ may very well be a concession of sorts to Ballmer’s concerns. Again, as Microsoft describes it, this metric will give “visibility into gross margin contribution from the commercial cloud.” But we’ll have to wait until October 20th to see how investors respond to these new metrics and what these new figures reveal about Microsoft’s growth.
