Microsoft Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 1993 (Second Quarter of Fiscal 1994). Microsoft Corporation is engaged in the development and sale of software products, including operating systems, applications, and hardware. The company reported 285,955,294 shares of common stock outstanding as of January 31, 1994.
Key Financial Metrics
| Metric | Q2 1993 | Q2 1992 | YTD 6mo 1993 | YTD 6mo 1992 |
|---|---|---|---|---|
| Net Revenues | $1,129M | $938M | $2,112M | $1,756M |
| Gross Profit | $944M | $781M | $1,768M | $1,464M |
| Operating Income | $415M | $326M | $758M | $615M |
| Net Income | $289M | $236M | $528M | $445M |
| Earnings Per Share | $0.95 | $0.78 | $1.74 | $1.48 |
| Cash & Short-Term Investments | $2,796M (as of Dec 31, 1993) | |||
| Net Cash from Operations | $665M (YTD 6mo 1993) |
Margins (Q2 1993): Gross Margin was 83.6%; Net Income Margin was 25.6%. The company has no material long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 20% year-over-year for the quarter and 20% for the six-month period.
- Product Performance: Operating systems sales grew 30% (driven by MS-DOS 6.2 and Windows OEM sales). Applications revenues grew 20% (led by Microsoft Office).
- Channel Mix: OEM revenues surged 66% to $268M. International revenues outside Europe grew 46% year-over-year.
- Expenses: Research and development expenses increased 35% due to hiring and third-party costs. Sales and marketing expenses rose 7%.
- Tax Rate: The effective income tax rate increased to 34% from 32% due to new U.S. tax laws.
Outlook, Risks, and Contingencies
Management Commentary: Management expects continued investment in R&D and facilities. Cash generated from operations is sufficient to fund operations and strategic ventures. Stock repurchases continue using funds from stock option exercises.
Legal Proceedings and Risks:
- Apple Computer Litigation: A lawsuit regarding copyright infringement of Windows visual displays was dismissed by the District Court in August 1993. Apple has appealed; Microsoft has cross-appealed. Damages claimed by Apple were previously $4.9 billion, which Microsoft deems insupportable.
- Stac Electronics Litigation: Stac alleges MS-DOS 6.0 infringes its data compression patents. A trial commenced in January 1994. Stac seeks $113 million in damages. An injunction could disrupt sales of DoubleSpace technology.
- Government Investigations: The FTC investigation was closed in August 1993. The U.S. Department of Justice and the European Commission are currently investigating potential antitrust/monopolization issues.
Unusual Items: Approximately $70 million in revenue was deferred related to free upgrade vouchers included in new Microsoft Office versions.
Investor Verification Checklist
- Verify the status and potential financial impact of the Stac Electronics patent trial regarding MS-DOS 6.0.
- Monitor the appeal process in the Apple Computer copyright case.
- Assess the progress and potential outcomes of the U.S. DOJ and EU antitrust investigations.
- Confirm the recognition timeline for the $70 million deferred revenue from Office upgrade vouchers.
- Review the sustainability of the 66% growth in OEM revenues as a primary driver of operating system sales.