Microsoft Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 1995 (Second Quarter of Fiscal 1996). Microsoft Corporation develops, manufactures, licenses, and supports software products including operating systems (Windows 95, MS-DOS, Windows NT), business applications (Microsoft Office), and online services (The Microsoft Network). The company operates through OEM, corporate license, and retail channels globally.
Key Financial Metrics
| Metric (in millions) | Q2 1995 | Q2 1996 | 6 Months 1995 | 6 Months 1996 |
|---|---|---|---|---|
| Net Revenues | $1,482 | $2,195 | $2,729 | $4,211 |
| Operating Income | $520 | $786 | $957 | $1,494 |
| Net Income | $373 | $575 | $689 | $1,074 |
| Earnings Per Share | $0.60 | $0.90 | $1.10 | $1.68 |
| Cash & Short-Term Investments | $3,839 (End Q1) | $6,017 (End Q2) | N/A | N/A |
| Net Cash from Operations | N/A | N/A | $835 | $1,901 |
Margins (Q2 1996): Net income margin was 26.2% (up from 25.2% in Q2 1995). Cost of revenues was 15.0% of revenue. Research and development expenses were 14.3% of revenue.
Liquidity & Debt: The company held $6.0 billion in cash and short-term investments as of December 31, 1995. There is no material long-term debt. The company has $70 million in standby credit lines.
Material Changes vs. Prior Period
- Revenue Growth: Q2 1996 revenues increased 48% year-over-year, driven primarily by volume increases in software licenses. Six-month revenues grew 54%.
- Product Performance: Platforms revenue surged 90% in Q2, led by Windows 95 and Windows NT. Applications revenue grew 20%, driven by Microsoft Office sales.
- Expense Increases: R&D expenses rose 57% due to hiring and third-party development costs. Sales and marketing expenses increased 44% due to Windows 95 and Office marketing campaigns.
- Balance Sheet: Total assets grew from $7.2 billion to $9.1 billion. Unearned revenues increased significantly to $495 million, largely due to Windows 95 support and upgrade coupons.
Outlook, Risks, and Contingencies
- Management Commentary: Management expects cash from operations to fund R&D and strategic acquisitions. The company continues its stock repurchase program, funded by stock option proceeds and the sale of equity put warrants.
- Strategic Moves: Microsoft merged with Vermeer Technologies (Web authoring) in January 1996. A joint venture with NBC was announced for a cable news channel and interactive online service, with Microsoft committing $220 million over five years.
- Legal Contingency: The U.S. Department of Justice Antitrust Division is investigating Microsoft's inclusion of client-access software for The Microsoft Network in Windows 95. Management believes this will not have a material adverse effect.
- Inventory Returns: The company provided for estimated returns of excess Windows 95 inventory from distributors who over-ordered prior to the August 1995 launch.
Investor Verification Checklist
- Verify the sustainability of Windows 95 revenue growth following the initial launch surge and distributor inventory corrections.
- Monitor the outcome of the U.S. Department of Justice antitrust investigation regarding Windows 95 bundling.
- Assess the impact of the $220 million NBC joint venture commitment on future cash flows.
- Review the recognition schedule for the $495 million in unearned revenues, particularly the $200 million tied to Windows 95 support and the $230 million tied to Office upgrade coupons.
- Confirm the effectiveness of the stock repurchase program and the valuation of the $560 million put warrant liability.