Sunday, May 6, 2012

Microsoft Earnings Slow More Than Expected

Microsoft ($MSFT) reported calendar Q1 2012 financial results on Thursday, April 19

Q1 performance was the expected letdown after the prior Q4's record high total revenues and earnings per share. The annual March slowdown was more pronounced than I expected when looking at YoY results. Both net income and earnings per share dipped slightly YoY, which suggests a base is not being built during the transition to battle Apple, Google, et al. in the leading edge technology race. This is the first time both have decreased YoY since the QE September 2009.

The good news is a negative trend was reversed. Gross margin increased, after setting a multi-year low in the prior quarter. However, the operating margin decreased, mostly the result in the dip in revenues and a general increase in operating expenses. Net margin dropped to a 7-quarter low. This isn't the high growth, high margin Microsoft grandpa used to talk about.

All segment revenues dropped, with lower-margin Entertainment & Devices plunging. This ruined the quarter and occurs every Q1 after the Q4 annual Holiday peak. Higher-margin Windows & Windows Live segment revenues slightly decreased, as did Business and Servers & Tools. This was the reason for the increase in gross profit margin.

CEO Steve Ballmer kept his game face on while touting the future, "We’re driving toward exciting launches across the entire company, while delivering strong financial results. With the upcoming release of new Windows 8 PCs and tablets, the next version of Office, and a wide array of products and services for the enterprise and consumers, we will be delivering exceptional value to all our customers in the year ahead." You go guy!

Mighty Microsoft needs to step up more in 2012. Management has marshaled their mega resources so the Empire can strike back. Total assets are now a record $118.01 billion. Apple, HP, and IBM are the other exclusive members of the Big Tech $100 Billion Club. However, the revolution is in progress. The mobile and open-source rebels have made tremendous gains and are at the gates.

Microsoft Income Statement Calendar Q1 2012 Microsoft reported total revenues of $17.41 billion, net income of $5.11 billion, and earnings per share of $0.60. From the prior calendar quarter Q4 2011, these were -17%, -23%, and -23%. From the prior calendar year Q1 2011, these were up +6%, -2%, and -2%, respectively. Gross margin increased QoQ and YoY to 77.30%. Operating margin dipped QoQ but increased YoY to 36.62%. Net margin dropped QoQ and YoY to 29.34%. Cash flow from operations per share increased cyclically to a record $1.13.

Microsoft Balance Sheet Calendar Q1 2012 Total assets increased to a record $118.01 billion. The capital ratio increased to a multi-year high of 58.18%. The current ratio is a very liquid 65.13%. Microsoft is very liquid with strong capital and has $59.53 billion in cash reserves (cash, cash equivalents, and marketable securities). Add noncurrent investments and the reserves are $68.60 billion. Return on assets are a 10-quarter low of 21.37%, which is still excellent. The debt ratio is stable and reasonable at 10.12% of total assets.

Microsoft Business Outlook Microsoft is revising operating expense guidance downward and now offers a range of $28.3 billion to $28.7 billion for the full year ending June 30, 2012. Microsoft also offers preliminary fiscal year 2013 operating expense guidance of $30.3 billion to $30.9 billion, representing 6% to 8% growth from the mid-point of fiscal year 2012 guidance.

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