Microsoft Corporation: Q1 2012 (Ended Sept 30, 2011) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2011 (Fiscal Q1 2012). Microsoft Corporation is a global technology leader focused on software, services, and hardware. The company operates through five primary segments: Windows & Windows Live, Server and Tools, Online Services, Microsoft Business, and Entertainment and Devices. The filing includes unaudited financial statements and management discussion regarding results of operations.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2012 (Sept 30, 2011) | Q1 2011 (Sept 30, 2010) |
|---|---|---|
| Revenue | $17,372 | $16,195 |
| Operating Income | $7,203 | $7,116 |
| Net Income | $5,738 | $5,410 |
| Diluted EPS | $0.68 | $0.62 |
| Operating Margin | 41.5% | 43.9% |
| Cash from Operations | $8,493 | $8,194 |
| Cash & Short-term Investments | $57,403 | $52,772 |
| Long-term Debt | $11,927 | $11,921 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7% year-over-year, driven by strong sales of the 2010 Microsoft Office system and Server and Tools products. A favorable foreign currency impact of $409 million contributed to the increase.
- Expense Increases: Operating expenses rose $1.09 billion. Cost of revenue increased 20% due to higher Xbox content royalties and online traffic acquisition costs. General and administrative expenses jumped 24% primarily due to Puerto Rican excise taxes and increased legal costs.
- Segment Performance:
- Microsoft Business Division: Revenue up 8% and operating income up 6%, led by Office 2010 sales.
- Server and Tools: Revenue up 10% and operating income up 4%, driven by SQL Server and Enterprise Services growth.
- Online Services: Revenue up 19% to $642 million, though the segment remained unprofitable with an operating loss of $494 million (improved from $549 million loss).
- Entertainment and Devices: Revenue up 9% due to Xbox 360 and Windows Phone, but operating income fell 9% to $248 million due to higher royalty costs.
- Share Repurchases: The company repurchased 38 million shares for $1.0 billion during the quarter. Approximately $11.2 billion remains of the $40 billion repurchase program.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event (Skype Acquisition): On October 13, 2011, Microsoft announced the acquisition of Skype for $8.6 billion in cash. This transaction was not included in the financial statements but is expected to be allocated primarily to goodwill and intangible assets.
- Tax Contingencies: The company is under audit by the IRS for tax years 2004–2011. A Revenue Agent's Report was issued for 2004–2006 regarding transfer pricing; Microsoft has filed a protest. Tax contingencies totaled $7.5 billion.
- Legal Proceedings: Significant litigation includes antitrust class actions (estimated total cost $1.9–$2.0 billion), patent disputes with Alcatel-Lucent and Uniloc, and ongoing patent litigation with Motorola regarding Android devices.
- Outlook: Management highlights opportunities in cloud computing, smart connected devices, and search. Risks include the transition to cloud-based models, competition from open-source software, and potential impairment of goodwill if fair value declines.
Investor Verification Checklist
- Skype Integration: Verify the final purchase price allocation and potential goodwill impairment risks associated with the $8.6 billion Skype acquisition.
- Tax Exposure: Monitor the outcome of the IRS audit appeal regarding transfer pricing, which could significantly impact future tax provisions.
- Online Services Profitability: Assess the trajectory of the Online Services Division, which generated significant revenue growth but continues to operate at a loss.
- Legal Reserves: Review updates on the Alcatel-Lucent and Uniloc patent cases, as well as the Motorola litigation, which could result in additional liabilities beyond the accrued $992 million.
- Foreign Currency: Evaluate the impact of foreign currency fluctuations on future revenue, given the significant portion of earnings generated outside the U.S.