Microsoft Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Microsoft Corporation for the quarter ended March 31, 2011. The company operates in five primary segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. The report includes unaudited financial statements and management discussion regarding operations, liquidity, and risk factors.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Nine Months Ended Mar 31, 2011 |
|---|---|---|
| Revenue | $16,428 million | $52,576 million |
| Operating Income | $5,709 million | $20,990 million |
| Net Income | $5,232 million | $17,276 million |
| Diluted EPS | $0.61 | $2.01 |
| Operating Margin | 34.8% | 39.9% |
| Cash from Operations | $8,672 million (3 months) | $21,052 million (9 months) |
| Total Cash & Investments | $50,150 million (as of Mar 31, 2011) | |
| Long-Term Debt | $11,915 million (as of Mar 31, 2011) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13% year-over-year for both the three-month and nine-month periods. Growth was driven by strong sales of the Xbox 360 console, Kinect sensors, the 2010 Microsoft Office system, and Server and Tools products.
- Profitability: Net income increased 31% for the quarter and 21% for the nine-month period. Diluted EPS increased 36% and 26% respectively, aided by share repurchases and a partial settlement with the IRS.
- Segment Performance:
- Entertainment and Devices: Revenue surged 60% (quarter) and 48% (nine months) due to Kinect and Xbox 360 sales.
- Microsoft Business Division: Revenue grew 21% (quarter) and 20% (nine months) driven by Office 2010 sales.
- Windows & Windows Live: Revenue declined 4% (quarter) and 3% (nine months), tracking a slight decline in the global PC market.
- Online Services: Revenue grew 14%, but operating losses widened due to higher costs associated with the Yahoo! search agreement and traffic acquisition.
- Debt Issuance: The company issued $2.25 billion in debt in February 2011 and $4.75 billion in September 2010 to fund share repurchases and acquisitions.
Guidance, Outlook, and Risks
- IRS Settlement: A partial settlement of an IRS audit for tax years 2004-2006 reduced income tax expense by $461 million in the quarter. However, the IRS has issued proposed adjustments for these years that Microsoft intends to contest.
- Strategic Alliance: On April 21, 2011, Microsoft formalized a strategic alliance with Nokia, adopting Windows Phone as Nokia's primary smartphone platform.
- Capital Allocation: Microsoft continues a $40 billion share repurchase program (announced 2008), with approximately $13.9 billion remaining as of March 31, 2011. Quarterly dividends were declared at $0.16 per share.
- Risk Factors: Key risks include intense competition in cloud computing, potential impairment of goodwill (particularly in the Online Services Division), security vulnerabilities, and the impact of global economic conditions on IT spending.
Investor Verification Checklist
- IRS Audit Status: Verify the potential financial impact of the proposed IRS adjustments for tax years 2004-2006, which could be significant if not resolved favorably.
- Online Services Losses: Monitor the trajectory of operating losses in the Online Services Division, which widened due to the Yahoo! agreement costs and traffic acquisition expenses.
- PC Market Correlation: Assess the impact of the slowing global PC market on the Windows & Windows Live Division revenue, which declined slightly year-over-year.
- Debt Maturity Profile: Review the long-term debt schedule, noting the issuance of zero-coupon convertible debt due in 2013 and various notes maturing between 2013 and 2041.
- Goodwill Impairment: Evaluate the carrying value of goodwill, specifically in the Online Services Division ($6.4 billion), against fair value estimates given the segment's operating losses.