Microsoft Corporation: Q1 2011 (Ended Sept 30, 2010) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010 (Fiscal Q1 2011). Microsoft Corporation is a large accelerated filer engaged in developing, manufacturing, licensing, and supporting software products and services, including operating systems (Windows), productivity applications (Office), server tools, online services (Bing, Xbox LIVE), and hardware (Xbox 360).
Key Financial Metrics
| Metric | Q1 2011 (Sept 30, 2010) | Q1 2010 (Sept 30, 2009) |
|---|---|---|
| Revenue | $16,195 million | $12,920 million |
| Operating Income | $7,116 million | $4,482 million |
| Net Income | $5,410 million | $3,574 million |
| Diluted EPS | $0.62 | $0.40 |
| Operating Margin | 43.9% | 34.7% |
| Cash from Operations | $8,194 million | $6,107 million |
| Total Cash & Short-term Investments | $44,173 million | $36,788 million (as of June 30, 2010) |
| Total Debt (Short + Long Term) | $10,665 million | $5,939 million (as of June 30, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 25% year-over-year, driven by strong sales of Windows 7, the 2010 Microsoft Office system, Server and Tools products, and the Xbox 360 console. A significant portion of the increase is attributable to the reversal of a $1.5 billion revenue deferral from the prior year related to Windows 7.
- Profitability: Operating income surged 59% to $7.1 billion. Operating margins expanded by 9.2 percentage points.
- Expense Trends: Cost of revenue rose 10% due to higher online costs and Xbox 360 volume. General and administrative expenses increased 27% primarily due to higher legal charges. Research and development expenses grew 6%.
- Debt Issuance: In September 2010, the company issued $4.75 billion in long-term debt securities, increasing total outstanding debt significantly compared to the prior quarter.
- Share Repurchases: The company repurchased 163 million shares for $4.0 billion during the quarter.
Guidance, Outlook, and Risks
- Outlook: Management remains positive about its market position and product pipeline, citing a wide range of products that help companies improve productivity. The company expects to continue investing in sales, marketing, and R&D.
- Segment Performance:
- Windows & Windows Live: Revenue up 66% (GAAP basis) driven by Windows 7 OEM sales.
- Server and Tools: Revenue up 12% driven by Windows Server and SQL Server growth.
- Online Services: Revenue up 8%, but operating loss widened to $560 million due to costs associated with the Yahoo! search agreement.
- Entertainment and Devices: Revenue up 27% driven by Xbox 360 console shipments and the launch of Halo Reach.
- Risks and Contingencies:
- Legal: Significant ongoing litigation includes antitrust class actions (estimated total cost $1.9B-$2.0B, with $621M accrued), patent disputes (Alcatel-Lucent, Uniloc, i4i), and government competition law matters.
- Market Risk: Exposure to foreign currency, interest rates, and equity prices. One-day Value-at-Risk (VaR) was $253 million as of Sept 30, 2010.
- Strategic: Risks associated with the transition to cloud-based computing, competition from open-source software, and potential security vulnerabilities.
Investor Verification Checklist
- Verify the impact of the Windows 7 revenue deferral reversal on the reported 25% revenue growth to understand organic performance.
- Review the Online Services Division operating loss of $560 million and the specific costs related to the Yahoo! search agreement.
- Assess the legal liability accruals ($870 million current, $375 million long-term) and the potential for additional costs up to $1.0 billion beyond recorded amounts.
- Confirm the details of the $4.75 billion debt issuance in September 2010 and its impact on future interest expenses.
- Monitor the share repurchase program status ($19.7 billion remaining) and its effect on diluted EPS.