Microsoft Corporation 10-Q Summary: Quarter Ended March 31, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, and the nine-month period ended on the same date. Microsoft Corporation is a large accelerated filer engaged in the development, manufacturing, licensing, and support of software products, including operating systems, server applications, productivity tools, and gaming hardware (Xbox). The company operates globally with significant revenue derived from licensing, online services, and hardware sales.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2008 | Nine Months Ended Mar 31, 2008 |
|---|---|---|
| Revenue | $14,454 million | $44,583 million |
| Operating Income | $4,409 million | $16,808 million |
| Net Income | $4,388 million | $13,384 million |
| Diluted EPS | $0.47 | $1.41 |
| Operating Margin | 30.5% | 37.7% |
| Cash from Operations | $7,082 million | $17,527 million |
| Cash & Short-Term Investments | $26,341 million (as of Mar 31, 2008) | |
| Total Debt | No material long-term debt reported. |
Material Changes vs. Prior Period
- Revenue: Flat for the quarter (+0.4%) compared to the prior year, driven by growth in Xbox, Server, and Online Services, offset by a decline in Client licensing revenue due to the absence of $1.7 billion in deferred revenue recognized in the prior year's third quarter (related to Windows Vista and Office Technology Guarantee programs). For the nine months, revenue grew 18%.
- Operating Income: Declined 33% for the quarter to $4.4 billion, primarily due to $1.5 billion in legal charges (including an €899 million European Commission fine) and increased headcount-related expenses. For the nine months, operating income grew 16%.
- Net Income: Decreased 11% for the quarter to $4.4 billion, largely due to the legal charges and a lower effective tax rate in the prior year. For the nine months, net income increased 21%.
- Segment Performance:
- Client: Revenue down 24% QoQ due to prior-year Vista launch timing; up 12% for nine months.
- Server and Tools: Revenue up 18% QoQ and 17% for nine months, driven by Windows Server and SQL Server growth.
- Online Services: Revenue up 40% QoQ, aided by the aQuantive acquisition, though operating losses widened due to integration costs.
- Entertainment and Devices: Revenue up 68% QoQ, driven by strong Xbox 360 console and game sales.
Guidance, Outlook, and Risks
- Outlook: Management expects double-digit revenue growth for fiscal year 2008. They project worldwide PC shipments to grow 11% to 13% and anticipate a favorable impact from foreign currency exchange rates.
- Acquisitions:
- Yahoo! Proposal: On Jan 31, 2008, Microsoft proposed acquiring Yahoo! for $44.6 billion. The offer was rejected by Yahoo's board on Feb 11, 2008, citing undervaluation. No assurance of completion exists.
- Recent Acquisitions: Acquired aQuantive (consolidated Q1 2008), Fast Search & Transfer ASA ($1.2 billion), and Danger, Inc. ($500 million) in April 2008.
- Legal Contingencies:
- European Commission: Accrued €899 million fine for competition law violations; two new investigations opened regarding Office interoperability and Windows web browsing capabilities.
- U.S. Antitrust: Consent Decree extended to November 2009. Class action settlements estimated at $1.7–$1.9 billion total cost.
- Patent Litigation: Ongoing disputes with Alcatel-Lucent and others; potential for significant damages or injunctive relief.
- Tax Matters: Effective tax rate dropped to 9% for the quarter due to a $1.2 billion tax provision reduction from resolving the 2000-2003 IRS examination. The company expects to pay approximately $3.0 billion to the IRS in the next year.
- Capital Allocation: Approximately $7.7 billion remains available under the share repurchase program. Quarterly dividend increased to $0.11 per share.
Key Facts for Investor Verification
- Verify the impact of the €899 million European Commission fine on future cash flows and potential for additional penalties from new investigations.
- Monitor the status of the Yahoo! acquisition proposal and potential financing requirements if the deal is restructured or pursued.
- Assess the sustainability of Xbox 360 growth and associated hardware margins given supply chain risks and manufacturing costs.
- Review the unearned revenue backlog ($12.1 billion) to gauge future revenue visibility, particularly for volume licensing programs.
- Track the resolution of the 2004-2006 IRS audit and the timing of the expected $3.0 billion tax payment.