Osprey Flyer: Microsoft Financial Performance Stalls in Q1 (Financial Charts, Review) *Total revenues & EPS drop* MSFT

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Microsoft reported calendar Q1 2011 financial results on April 28, 2011

* Charts and commentary have been updated for Microsoft calendar Q1 March 2011 financial results *

Microsoft Q1 Financial Performance Stalls

Microsoft Summary Calendar Q1 2011 Microsoft calendar Q1 March 2011 financial performance dropped from the record-setting calendar Q4 2010. Earnings per share of $0.61 were a 3-quarter low. Q1 has been an annual cyclical low for Microsoft for 3 years. Gross margin increased slightly but net margin decreased. Financial position continues strong, very liquid, and total assets are now just below $100 billion.

Microsoft Income Statement Calendar Q1 2011 Microsoft reported total revenues of $16.43B, net income of $5.71B, and earnings per share of $0.61. From the prior calendar quarter Q4 2010, total revenues were down -17.67%, net income down -21.13%, and earnings per share down -20.78%. Compared to the prior calendar year Q1 2010, these were up +13.27%, +30.60%, and +35.56%, respectively. For calendar Q1 2011, gross margin increased QoQ to 76.28%, but is still below historical 80+% range. Operating margin dropped QoQ to 34.75%, which is a 6-quarter low. Net margin dipped to 31.85%, but is the 3rd consecutive quarter above 30%. Cash flow from operations per share increased dramatically to $1.02 from the prior Q4 2010 of $0.49. Most of the increase in cash flow was attributable to a decrease in accounts receivable.

Microsoft Balance Sheet Calendar Q1 2011 Total assets increased QoQ +8.04% to a record $99.7B from the prior quarter of $92.3B. The capital to assets ratio (total stockholders' equity divided by total assets) increased QoQ to 53.60%. The current ratio (current assets divided by total assets) is a very liquid 66.44%, which is a multi-year high. Microsoft is very liquid with strong capital and has $50+B in cash reserves (cash, cash equivalents, and marketable securities).

Microsoft Business Outlook Microsoft reaffirmed operating expense guidance of $26.9 billion to $27.3 billion for the full year ending June 30, 2011. Microsoft also offered preliminary operating expense guidance of $28.0 billion to $28.6 billion for the full fiscal year ending June 30, 2012.

Microsoft Financial Performance by the Quarters (Charts)

Microsoft Earnings per Share and Cash Flow per Share (Chart) Below is a chart of quarterly earnings per share and cash flow from operations per share. Earnings per share dipped during the Global Recession but has now been above $0.60 for 3 consecutive quarters, including record high of $0.77 in Q4 December 2010 and the current Q1 March 2011 of $0.61. The current EPS is a 3-quarter low. Cash flow per share rose to a multi-year high of $1.02 in the current Q1 March 2011. Large changes in accounts receivable have been a major variable in the swings in cash flow per share.

Microsoft Total Revenues, Operating Income, and Net Income (Chart) Below is a chart of quarterly total revenues, quarterly operating income, and quarterly net income. Total Revenues reached an all-time high of $19.95B in Q4 December 2010, but dipped to $16.43B in the current Q1 March 2011. Operating Income reached a near-record of $8.2B in Q4 December 2010, but dropped $5.71B in current Q1 March 2011. The all-time high continues to be $8.51B in Q4 December 2009. Current Q1 March 2011 Net Income of $5.23B also decreased from the Q4 December 2010 of $6.634B. The all-time high continues to be $6.662B in Q4 December 2009.

Microsoft Gross Margin, Operating Margin, and Net Margin (Chart) Below is a chart of quarterly gross margin, quarterly operating margin, and quarterly net margin. Gross Margin increased slightly to 76.28% in Q1 March 2011, after a multi-year low was set in Q4 December 2010 of 75.78%. Both are well below the historical 80+% area. This has been the big negative for Microsoft's latest 2 quarters. Operating Margin dropped to 34.75% in the current Q1 March 2011, which is below historical levels and the 40% benchmark. Operating expenses were actually reasonable, it's the drop in Total Revenues that pulled down Operating Margin. Current Q1 March 2011 Net Margin of 31.85% is reasonable, but below the prior 2 quarters of approximately 33% and is mostly attributable to a lower effective income tax rate.

Microsoft Return on Assets (Chart) Below is a chart of annual return on average assets per quarter. The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. The ROA dipped during the Global Recession but has since rebounded. The current Q1 March 2011 increased slightly to 23.97%, which is still excellent.

Microsoft Growth Rates (Chart) Below is a chart of the quarterly (QoQ, Q/Q, quarterly change) growth rates for total revenues and earnings per share. Total Revenues decreased -17.67% in Q1 March 2011, after increasing for 3 consecutive quarters, by +10.59%, +0.97%, and now +23.20%. Earnings per Share decreased -20.78% in Q1 March 2011, after increasing for 3 consecutive quarters, by +13.33%, +21.57%, and now +24.19%. Q1 is historically the weakest quarter for Microsoft, especially after the Q4 annual cyclical peak due to holiday sales.

Microsoft Reports Calendar Q1 2011 Financial Results

Strong enterprise and Xbox momentum drive revenue growth of 13% and earnings per share of $0.61.

“We delivered strong financial results despite a mixed PC environment, which demonstrates the strength and breadth of our businesses," said Peter Klein, chief financial officer at Microsoft. "Consumers are purchasing Office 2010, Xbox and Kinect at tremendous rates, and businesses of all sizes are purchasing Microsoft platforms and applications."

Microsoft Business Division revenue grew 21% year-over-year. Since its release last spring, Office 2010 has become the fastest-selling version of Office in history, and the integrated innovation with SharePoint, Exchange, Lync and Dynamics CRM is driving significant growth for the division.

Server & Tools revenue grew 11% year-over-year, the fourth consecutive quarter of double-digit growth. Strong business adoption of Windows Server 2008 R2, SQL Server 2008 R2, and System Center are driving record revenue and margin expansion.

Windows 7 remains the fastest selling operating system in history with 350 million licenses sold. Revenue for the segment was down 4% in the third quarter, in line with the PC trends, excluding prior year launch impact.

Online Services Division revenue grew 14% year-over-year primarily driven by increases in search revenue. Bing's US search share increased to 13.9% this quarter.

Entertainment & Devices Division grew 60% year-over-year, fueled by Kinect for Xbox 360, the fastest-selling consumer electronics device in history, continued strong Xbox 360 console sales and growth of Xbox Live.

"We delivered strong third quarter revenue from our business customers, driven by outstanding performance from Windows Server, SQL database, SharePoint, Exchange, Lync and increasingly our cloud services," said Kevin Turner, chief operating officer at Microsoft. "Office had another huge quarter, again exceeding everyone's expectations, and the addition of Office 365 will make our cloud productivity solutions even more compelling. We continue to see strong adoption of our cloud-based services among the Fortune 500."

About Microsoft

Founded in 1975, Microsoft (Nasdaq "MSFT") is the worldwide leader in software, services and solutions that help people and businesses realize their full potential. Employees: 88,596 worldwide at June 30, 2010.

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