Microsoft Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Microsoft Corporation for the period ended March 31, 2007. The company operates in five segments: Client, Server and Tools, Online Services Business (OSB), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD). The reporting period covers the third quarter of fiscal year 2007.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2007 | Nine Months Ended Mar 31, 2007 |
|---|---|---|
| Revenue | $14,398 million | $37,751 million |
| Operating Income | $6,589 million | $14,535 million |
| Net Income | $4,926 million | $11,030 million |
| Diluted EPS | $0.50 | $1.11 |
| Operating Margin | 45.8% | 38.5% |
| Cash from Operations (9mo) | $13,394 million | |
| Cash & Equivalents (Mar 31, 2007) | $7,611 million | |
| Total Cash, Equivalents & Short-term Investments | $28,236 million | |
| Long-term Debt | None reported |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 32% year-over-year for the quarter and 16% for the nine-month period. Growth was driven by the launch of Windows Vista and the 2007 Microsoft Office system, as well as increased licensing of Windows Server, SQL Server, and Visual Studio.
- Profitability: Operating income surged 69% for the quarter and 15% for the nine-month period. This was driven by revenue growth and a shift to higher-margin products, partially offset by increased headcount and marketing costs.
- Segment Performance:
- Client: Revenue up 67% (quarter) due to Windows Vista licensing and a 20% increase in OEM license units.
- Microsoft Business Division: Revenue up 34% (quarter) driven by the 2007 Office system launch.
- Entertainment and Devices: Revenue down 21% (quarter) due to lower Xbox 360 console shipments (0.5 million vs. 1.7 million in the prior year quarter), though nine-month revenue was up 42%.
- Online Services Business: Operating loss widened to $205 million (quarter) due to heavy investments in Windows Live and data center costs, despite advertising revenue growth.
- Share Repurchases: The company repurchased $6.7 billion of common stock in the quarter and $20.4 billion in the nine-month period. Approximately $22.5 billion remained available under the authorized repurchase program.
Guidance, Outlook, and Risks
- Outlook: Management expects revenue and operating income to continue growing in the fourth quarter of fiscal 2007, driven by recent product launches. PC unit growth is estimated at 10% to 12% for the quarter.
- Legal Contingencies:
- European Commission: A new statement of objections regarding server protocol licensing terms threatens potential fines up to $1.2 billion. Microsoft has appealed previous fines totaling over $950 million.
- Alcatel-Lucent: A jury awarded Alcatel-Lucent $1.52 billion in damages in a patent trial; Microsoft is appealing. Additional trials are scheduled.
- Class Actions: Estimated total cost to resolve antitrust and unfair competition class actions ranges between $1.7 billion and $1.9 billion.
- Risk Factors: Key risks include challenges from open-source software, intense competition, intellectual property infringement claims, security vulnerabilities in products, and potential supply chain disruptions for Xbox 360 components.
Investor Verification Checklist
- Verify the sustainability of revenue growth following the recognition of $1.7 billion in previously deferred revenue related to Windows Vista and Office technology guarantee programs.
- Monitor the outcome of the European Commission's new statement of objections and the potential $1.2 billion fine.
- Assess the impact of the $1.52 billion Alcatel-Lucent patent verdict and the status of ongoing appeals.
- Review the trajectory of the Online Services Business (OSB) operating losses as investments in Windows Live and advertising platforms continue.
- Confirm the execution of the $36.2 billion share repurchase authorization and its impact on earnings per share.