Microsoft Corporation: Q2 2013 (Ended Dec 31, 2012) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 2012 (Fiscal Q2 2013). Microsoft reported results following the October 2012 launch of Windows 8 and the Surface tablet. The company operates through five segments: Windows Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division.
Key Financial Metrics
| Metric (in millions) | Q2 2013 | Q2 2012 | YTD 6 Months 2013 | YTD 6 Months 2012 |
|---|---|---|---|---|
| Revenue | $21,456 | $20,885 | $37,464 | $38,257 |
| Gross Profit | $15,764 | $15,247 | $27,604 | $28,842 |
| Operating Income | $7,771 | $7,994 | $13,079 | $15,197 |
| Net Income | $6,377 | $6,624 | $10,843 | $12,362 |
| Diluted EPS | $0.76 | $0.78 | $1.28 | $1.46 |
| Cash from Operations (6mo) | $13,264 | |||
| Total Cash & Investments | $68,312 (as of Dec 31, 2012) | |||
| Total Debt | $14,250 (as of Dec 31, 2012) |
Material Changes vs. Prior Period
- Revenue Growth: Q2 revenue increased 3% year-over-year, driven by the launch of Windows 8 and Surface, and strong Server and Tools sales. This offset declines in the Entertainment and Devices Division.
- Operating Income Decline: Operating income decreased 3% in Q2 and 14% year-to-date. This was primarily due to increased operating expenses, specifically a 15% rise in Sales and Marketing (driven by Windows 8/Surface advertising) and a 7% rise in R&D.
- Revenue Deferrals: Significant revenue was deferred in the current period related to the "Office Upgrade Offer," "Windows Upgrade Offer," and "Video Game Deferral," impacting reported revenue for the six-month period.
- Acquisitions: Microsoft acquired Yammer for $1.1 billion in cash in July 2012, adding $937 million in goodwill.
- Debt Issuance: In November 2012, the company issued $2.25 billion in debt securities to take advantage of favorable market rates.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful launch of Windows 8 and Surface as key drivers for the quarter. They noted that while revenue grew, operating margins were pressured by heavy investment in marketing and R&D for new products. The company continues to invest in cloud services (Windows Azure, Office 365) and mobile platforms (Windows Phone).
Risks and Contingencies:
- Legal Proceedings: Significant ongoing litigation includes antitrust matters in the EU regarding the "Browser Choice Screen" and patent disputes with Motorola Mobility regarding Android devices and Xbox products. The company has accrued $531 million in current and $194 million in long-term liabilities for legal matters, with potential additional exposure of approximately $1.8 billion.
- Tax Audits: The company remains under IRS audit for tax years 2004–2011, with transfer pricing being a primary unresolved issue.
- Competition: Intense competition in mobile devices and cloud services poses risks to market share and margins.
Investor Verification Checklist
- Revenue Recognition Timing: Verify the impact of revenue deferrals (Office, Windows, Video Games) on future quarters' reported revenue.
- Operating Expense Trajectory: Monitor if Sales and Marketing expenses normalize post-launch of Windows 8 and Surface.
- Entertainment and Devices Performance: Assess the sustainability of Xbox 360 console sales declines and the adoption rate of Windows Phone.
- Legal Exposure: Track developments in the Motorola patent litigation and EU antitrust proceedings for potential fines or injunctions.
- Cash Repatriation: Note that approximately $61 billion of cash is held in foreign subsidiaries; repatriation could trigger significant tax liabilities.