Microsoft Corporation 10-Q Summary: Quarter Ended March 31, 2013
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2013 (Fiscal Year 2013, Q3). Microsoft Corporation is a technology leader focused on software, cloud services, and hardware. The reporting period includes the launch of Windows 8 and the Surface tablet, as well as the integration of the Yammer acquisition completed in July 2012.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9 Months 2013 | 9 Months 2012 |
|---|---|---|---|---|
| Revenue | $20,489 million | $17,407 million | $57,953 million | $55,664 million |
| Net Income | $6,055 million | $5,108 million | $16,898 million | $17,470 million |
| Diluted EPS | $0.72 | $0.60 | $1.99 | $2.05 |
| Operating Income | $7,612 million | $6,374 million | $20,691 million | $21,571 million |
| Operating Margin | 37.2% | 36.6% | 35.7% | 38.7% |
| Cash from Operations (9mo) | $22,930 million | |||
| Total Cash & Investments | $74,483 million (as of Mar 31, 2013) | |||
| Long-Term Debt | $11,949 million (excluding current portion) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenue increased 18% year-over-year, driven by new products (Windows 8, Surface, Office 2013) and growth in Server and Tools and Entertainment and Devices divisions. This offset a decline in the x86 PC market.
- Profitability: Q3 Net Income rose 19% to $6.06 billion. However, for the nine-month period, Net Income declined 3% due to higher operating expenses and cost of revenue.
- Expense Increases: General and Administrative expenses surged 44% in Q3, primarily due to a €561 million ($733 million) fine from the European Commission for failing to comply with a 2009 agreement regarding the "Browser Choice Screen."
- Segment Performance:
- Windows Division: Revenue up 23% in Q3, aided by $1.1 billion in recognized revenue from the Windows Upgrade Offer.
- Entertainment and Devices: Revenue up 56% in Q3, driven by Xbox 360 platform revenue and Windows Phone growth.
- Online Services: Operating loss narrowed significantly (45% improvement) due to lower traffic acquisition costs.
Guidance, Outlook, and Risks
Management Commentary: Management highlights the strategic shift toward cloud-based services and new device form factors (Surface, Windows 8). They note that while investments in new products are driving revenue, they are also increasing costs. The company expects to continue investing in R&D, sales, and marketing.
Risks and Contingencies:
- Legal: Beyond the EU fine, Microsoft faces ongoing antitrust litigation, including class actions in Canada and patent disputes with Motorola Mobility regarding Android devices and Xbox products.
- Tax: The company is under audit by the IRS for tax years 2004–2012. Unresolved transfer pricing issues could significantly impact financial statements if not resolved favorably.
- Market: Intense competition in mobile platforms and cloud services poses risks to market share and margins. The company also faces risks related to the decline in the traditional PC market.
Investor Verification Checklist
- EU Fine Impact: Verify the non-deductible nature of the $733 million European Commission fine and its specific impact on the effective tax rate and operating margins.
- Revenue Deferrals: Review the magnitude of revenue deferred due to the "Office Upgrade Offer" and "Windows Upgrade Offer," which impacts the timing of revenue recognition.
- PC Market Exposure: Assess the sustainability of revenue growth given the reported decline in the x86 PC market and the company's reliance on OEM partners.
- Patent Litigation: Monitor the status of the Motorola Mobility patent disputes, particularly regarding potential injunctions on Xbox products in Germany and the U.S.
- Capital Allocation: Confirm the remaining balance of the $40 billion share repurchase program ($4.6 billion remaining as of March 31, 2013) and dividend sustainability.