MSFT

Microsoft Corporation 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2001, and the nine months ended on that date. Microsoft Corporation develops, manufactures, licenses, and supports software products for servers, PCs, and intelligent devices, alongside online services (MSN) and hardware. The company operates through four segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and Devices; Consumer Commerce Investments; and Other.

Key Financial Metrics

Liquidity: As of March 31, 2001, total cash and short-term investments were $30.02 billion. The company has no material long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 14% year-over-year, driven by Windows 2000 Professional, SQL Server, and .NET Enterprise Servers. Nine-month revenue grew 10%.
• Segment Performance: Desktop and Enterprise Software revenue grew 13% in Q3. Consumer Commerce Investments (including Expedia) saw significant growth (178% in Q3) due to acquisitions. Consumer Software revenue grew 22% in Q3, though PC games and learning software declined.
• Investment Income: Q3 investment income decreased to $706 million from $882 million, primarily due to lower net recognized gains and $364 million in impairments of certain investments, partially offset by higher interest income.
• Accounting Change: Adoption of SFAS 133 (Derivatives) on July 1, 2000, resulted in a cumulative after-tax reduction to income of $375 million for the nine months ended March 31, 2001.
• Foreign Exchange: Weaker European and Japanese currencies negatively impacted translated revenue by approximately $160 million in Q3 and $425 million for the nine-month period.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate for fiscal 2001 to be 33%. The company plans to continue investing in sales, marketing, R&D, and facilities.
• Acquisition: On April 5, 2001, Microsoft completed the acquisition of Great Plains Software, Inc., valued at approximately $1.1 billion in a stock transaction.
• Share Repurchases: The company repurchased 65.4 million shares for $4.4 billion in the first nine months of fiscal 2001. Outstanding put warrants allow for the potential repurchase of 94 million shares.
• Legal Risks:
  • Antitrust: The U.S. DOJ and state Attorneys General case is on appeal. A lower court previously ordered a divestiture, which is stayed pending the appeal. The European Commission has also initiated proceedings regarding interoperability and licensing.
  • Class Actions: Numerous overcharge class action lawsuits and employment discrimination cases are pending. Management believes these will not have a material adverse impact.
  • SEC Investigation: The SEC is conducting a non-public investigation into the company's accounting reserve practices.
• Market Risks: Exposure to foreign currency, interest rate, and securities price risks. Value-at-Risk (VAR) models indicate potential 20-day losses of up to $355 million for interest-sensitive investments and $520 million for equity securities.

Investor Verification Checklist

• Verify the status and potential financial impact of the U.S. antitrust appeal and European Commission proceedings.
• Review the details of the SEC investigation into accounting reserve practices.
• Assess the integration and financial impact of the Great Plains Software acquisition.
• Monitor the trend in investment impairments and the valuation of the $30 billion investment portfolio.
• Confirm the sustainability of revenue growth in the Desktop Platforms segment given the noted slowdown in overall PC shipments.