Microsoft Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2000. Microsoft Corporation develops, manufactures, licenses, and supports software products for servers, PCs, and intelligent devices, alongside online services (MSN) and hardware. The company operates through four segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and Devices; Consumer Commerce Investments; and Other.
Key Financial Metrics
| Metric | Q1 FY2001 (Sep 30, 2000) | Q1 FY2000 (Sep 30, 1999) |
|---|---|---|
| Revenue | $5,800 million | $5,384 million |
| Operating Income | $2,777 million | $2,789 million |
| Net Income | $2,206 million | $2,191 million |
| Diluted EPS | $0.40 | $0.40 |
| Cash from Operations | $2,960 million | $2,857 million |
| Cash & Short-Term Investments | $24,711 million | $23,798 million (Jun 30, 2000) |
| Long-Term Debt | None | None |
Margins: Operating margin was approximately 47.9% ($2,777m / $5,800m). Cost of revenue was 14.8% of revenue.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8% year-over-year, driven by licensing of Windows 2000 Professional, Windows Me, and SQL Server. Consumer Software revenue grew 31%.
- Accounting Change (SFAS 133): Effective July 1, 2000, Microsoft adopted SFAS 133 regarding derivative instruments. This resulted in a one-time pre-tax reduction to income of $560 million ($375 million after-tax), reducing reported Net Income and EPS.
- Investment Income: Investment income surged to $1,127 million (up from $550 million) due to net realized gains on investments (including Titus Communications and Transpoint) and higher interest income.
- Operating Expenses: Total operating expenses rose to $3,023 million. R&D expenses increased 18% to $956 million due to headcount and new product initiatives.
- Share Repurchases: The company repurchased 25.5 million shares ($1,752 million) in the quarter, compared to 12.1 million shares in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue investing in sales, marketing, and R&D, including using cash for strategic acquisitions. The company anticipates existing cash and short-term investments will meet operating requirements.
- Legal Proceedings:
- Antitrust: The U.S. DOJ and state Attorneys General case resulted in a preliminary judgment ordering a divestiture. Microsoft appealed; the Supreme Court remanded the case to the Court of Appeals in September 2000. A stay on the remedy is in effect pending final appeal.
- Sun Microsystems: Ongoing litigation regarding Java technology. A preliminary injunction on unfair competition was partially reinstated; Microsoft is in compliance.
- SEC Investigation: The SEC is conducting a non-public investigation into the company's accounting reserve practices.
- European Commission: Proceedings allege failure to disclose interoperability information and discriminatory licensing.
- Market Risk: The company is exposed to foreign currency, interest rate, and securities price risks, utilizing a Value-at-Risk (VAR) model to manage these exposures.
Investor Verification Checklist
- Verify the impact of the SFAS 133 accounting change on the comparability of current earnings to prior periods.
- Monitor the status of the U.S. antitrust appeal and potential divestiture remedies.
- Assess the sustainability of investment income, which was significantly boosted by one-time realized gains.
- Review the progress of the Windows 2000 and Windows Me migration in the OEM channel, which faced soft business PC shipments.
- Confirm the outcome of the SEC investigation into accounting reserve practices.