September of 2015 was a busy month for Microsoft, especially with the general release of Office 2016. However, with all the Office activity, you may have missed a couple of announcements regarding changes to Microsoft’s financial reporting. While not as important as Office 2016, the announcements do reflect Microsoft’s recent changes in business strategy.
Since the Build 2015 Conference, held in May of 2015, Microsoft CEO Satya Nadella has emphasized the company’s new business strategy with the mantra of mobile-first, cloud-first. This philosophy runs through everything Microsoft says or does.
In a press release published on September 28, 2015, Microsoft announced a significant change in the way the company will report its financial results that supports the mantra. Beginning in fiscal year 2016, which technically started in July of 2015, the company will report revenue and operating income based on three operating segments:
- Productivity and Business Processes: This segment will include results from Office and Office 365 for commercial and consumer customers, as well as Dynamics and Dynamics CRM Online.
- Intelligent Cloud: This segment will include results from public, private, and hybrid server products and services, such as Windows Server, SQL Server, System Center, Azure, and Enterprise Services.
- More Personal Computing: This segment will include results from licensing of the Windows operating system, devices such as Surface tablets and smartphones, gaming including Xbox consoles, and search.
In previous years, Microsoft crammed those three segments into only two segments.
With this arrangement, the performance of the Productivity and Business Processes segment (aka Office) and the performance of the Intelligent Cloud segment (aka Azure) can be highlighted in conference calls and financial reports. These segments represent the high-growth activities in Microsoft’s portfolio and high growth is what the investment community craves.
This new reporting structure will better reflect what is actually happening at the company with regard to its business strategy, and it will give stakeholders more accurate information for making investment decisions. But more importantly, stakeholders can get a better idea of what Microsoft’s future performance will be in a mobile-first, cloud-first world.
In a separate press release made earlier in September, Microsoft announced that it was raising the quarterly dividend on its common stock by $0.05 cents to $0.36 per share. That’s an increase of 16.1% and should make shareholders happy. The dividend will be paid to shareholders of record on November 19, 2015.
Microsoft has steadily raised its stock dividend on an annual basis for years now. This latest increase reflects the company’s confidence that it can continue to generate excess cash while still spending for acquisitions and on the development of new products. Management believes they have a winning strategy in place and are rewarding investors for their continued support.
In terms of market capitalization, as of June 2015, Microsoft is the second largest company on the Financial Times Global 500. The success, or lack thereof, of Microsoft is a reflection on, and an insight into, the overall status of the entire Information Technology industry. So, how Microsoft chooses to report its financial results is a big deal.
By adjusting its reporting to reveal financial results based on how the mobile- and cloud-based initiatives are doing, Microsoft should give the overall tech industry a better measurement on which to base its relative performance. For industry stakeholders, better and more accurate information is always welcomed and appreciated.
Can you see why Microsoft would want to change the emphasis of its financial reporting? Do you think the new segments will better reflect financial performance? Does it matter? Why or why not? Share your thoughts in the discussion thread below.