Osprey Flyer: Microsoft Reports Mixed Financial Results (Charts, Video) *Revenues flat; Net Income & EPS down* MSFT

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Microsoft (MSFT) reported calendar Q3 2011 financial results on Thursday, October 20, 2011

Microsoft Reports Mixed Financial Performance: Revenues flat; Net Income & EPS down

Microsoft Summary Calendar Q3 2011 Microsoft's financial performance was good, but not impressive, YoY and mixed QoQ. Total revenues were flat while net income, earnings per share, gross margin, net margin, and return on assets decreased QoQ. Operating income, operating margin, and cash flow per share increased QoQ. Financial position continues strong, very liquid with $66 billion in cash and investments, and total assets continue above $100 billion. Return on assets is an excellent +23.49%. Calendar Q4 is the annual cyclical peak for Microsoft and an excellent financial performance is expected, followed by a dip in calendar Q1 2012. Whether the Microsoft business model has peaked and newer ventures (e.g cloud-based services and smartphones) can offset the decline should become evident in 2012.

Microsoft Income Statement Calendar Q3 2011 Microsoft reported total revenues of $17.37 billion, net income of $5.74 billion, and earnings per share of $0.68. From the prior calendar quarter Q2 2011, total revenues were up +0.03%, net income down -2.32%, and earnings per share down -1.45%. Compared to the prior calendar year Q3 2010, these were up +7.27%, up +6.06%, and up +9.68%, respectively. Gross margin decreased slightly QoQ to 78.26%. Operating margin increased QoQ to 41.46%. Net margin decreased slightly QoQ to 33.03%. Cash flow from operations per share increased to $1.00 from the prior quarter of $0.70. Most of the increase in cash flow was attributable to a decrease in accounts receivable.

Microsoft Balance Sheet Calendar Q3 2011 Total assets decreased QoQ +1% to a $107.42 billion from the prior quarter record of $108.70 billion. The capital to assets ratio (total stockholders' equity divided by total assets) decreased QoQ and YoY to 55%. The current ratio (current assets divided by total assets) is a very liquid 70%, which is a multi-year high. Microsoft is very liquid with strong capital and has $57.40 billion in cash reserves (cash, cash equivalents, and marketable securities). Add noncurrent investments and the reserves are $65.98 billion. Return on assets dipped slightly QoQ, but continue at an excellent 23.49%. The debt ratio increased slightly QoQ to a reasonable 11.1% of total assets.

Microsoft Business Outlook Beginning in the second fiscal quarter, Microsoft’s results will include the results of Skype. The company offers updated fiscal 2012 operating expense guidance, including Skype and the associated acquisition-related expenses, of $28.6 billion to $29.2 billion.

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. Current Earnings per Share of $0.68 are a -1.45% QoQ decrease and a +9.68% increase YoY. The record high was calendar Q4 2010 of $0.77. Current Cash flow per Share increased to $1.00, which is just below the multi-year high in March 2011. This continues the up and down pattern. Large changes in accounts receivable have been the major variable in the swings in cash flow per share. The chart averages for EPS and CFS are $0.55 and $0.69, respectively.

Microsoft Total Revenues, Operating Income, and Net Income (Chart) Below is a chart of quarterly total revenues, quarterly operating income, and quarterly net income. Current Total Revenues of $17.37 billion are a mere 0.03% QoQ increase and +7.27% YoY increase. The all-time high was $19.95 billion in calendar Q4 2010. Current Operating Income of $7.20 billion is an increase both QoQ and YoY, mostly attributable to a $1.02 billion decrease QoQ in sales & marketing expenses. The all-time high was $8.51 billion in calendar Q4 2009. Current Net Income of $5.74 billion is a -2.32% QoQ decrease and a +6.06% YoY increase, mostly attributable to a $1.13 billion increase QoQ in provision for income taxes. The recent peak was $6.63 billion in calendar Q4 2010 and the all-time high was $6.66 billion in calendar Q4 2009. The chart averages for TR, OI, and NI are $16.02 billion, $6.06 billion, and $4.79 billion, respectively.

Microsoft Gross Margin, Operating Margin, and Net Margin (Chart) Below is a chart of quarterly gross margin, quarterly operating margin, and quarterly net margin. Current Gross Margin of 78.26% is within the recent historical range and a decrease both QoQ and YoY. Microsoft had been operating in the past at the 80+% area. This has been a slight negative for Microsoft's latest 4 quarters, not maintaining an 80+% gross profit margin. However, the gross margin continues at an extremely profitable level. Current Operating Margin of 41.46% is a 5-quarter high and an increase both QoQ and YoY. A significant decrease and sales & marketing expense was the major reason. Current Net Margin of 33.03% is historically strong, but decreased slightly both QoQ and YoY. The multi-year peak has been 35.02% in calendar Q4 2009. The chart averages for GM, OM, and NM are 79.00%, 41.24%, and 29.46%, respectively.

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 some. The current Return on Assets of 23.49% is an excellent, but dipped QoQ. This is an even more amazing ROA when taken into consideration that Microsoft's total assets have now exceeded $100 billion for 2 consecutive quarters. The ROA chart average is 23.06%.

Microsoft Growth Rates (Chart) Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for revenues and earnings per share. Microsoft, as with some other technology companies, has an annual cyclical high in Q4 and an annual cyclical low in Q1. Therefore, comparing YoY growth rates best reflects Microsoft's growth. Current Total Revenues Growth of +7.27% is just above average, but not strong. The TRG chart average is +5.56%. Current Earnings per Share Growth of +9.68% is slowing. The EPSG chart average is +17.07%.

Microsoft Segment Revenues (Chart) Below is a chart of segment revenues by quarter. Business leads at $5.62 billion and 32% of sales, but decreased QoQ. Windows and Windows Live increased slightly to $4.87 billion and 28% of sales. Server and Tools decreased to $4.25 billion and 24% of sales. Entertainment and Devices increased to $1.96 billion and 11% of sales. Online Services at $625 million and Other at $44 million comprise 4% of sales.

Microsoft Operating Expense Ratio (Chart) Below is a chart of quarterly operating expense ratio, which is operating expenses divided by total revenues. The current Operating Expense Ratio of 36.79% is very good. The OER chart average of 40.12%. This indicates in the current quarter both increased efficiency plus a higher proportion of revenues reaching the bottom line, net income, and earnings per share.

Microsoft Reports Record First-Quarter Results

REDMOND, Wash. — Oct. 20, 2011 — Microsoft Corp. today announced record first-quarter revenue of $17.37 billion for the quarter ended Sept. 30, 2011, a 7% increase from the same period of the prior year. Operating income, net income, and diluted earnings per share for the quarter were $7.20 billion, $5.74 billion, and $0.68 per share, which represented increases of 1%, 6%, and 10%, respectively, when compared with the prior year period.

“We saw customer demand across the breadth of our products, resulting in record first-quarter revenue and another quarter of solid EPS growth,” said Peter Klein, chief financial officer at Microsoft. “Our product portfolio is performing well, and we’ve got an impressive pipeline of products and services that positions us well for future growth.”

"We had another strong quarter for Office, SharePoint, Exchange, and Lync, and saw growing demand for our public and private cloud services including Office 365, Dynamics CRM Online, and Windows Azure,” said Kevin Turner, chief operating officer at Microsoft. "With a great set of consumer products like Windows 7 PCs, Windows Phone 7.5, Xbox and Kinect, we are excited about the holiday buying season.”

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