Business Context and Reporting Period
Company: Microsoft Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended December 31, 1999 (Fiscal Year 2000)
Business Overview: Microsoft develops, manufactures, and licenses software products including operating systems (Windows), productivity applications (Office), server applications, and developer tools. The company also operates online services (MSN, Expedia) and sells PC input devices.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 1999 | Six Months Ended Dec 31, 1999 |
|---|---|---|
| Revenue | $6,112 million | $11,496 million |
| Operating Income | $2,918 million | $5,685 million |
| Net Income | $2,436 million | $4,627 million |
| Diluted EPS | $0.44 | $0.84 |
| Cash from Operations (6mo) | $4,138 million | |
| Cash & Short-Term Investments | $17,843 million (as of Dec 31, 1999) | |
| Total Assets | $45,093 million (as of Dec 31, 1999) | |
| Stockholders' Equity | $34,589 million (as of Dec 31, 1999) | |
| Long-Term Debt | None reported; $100 million in standby credit lines. |
Margins (Three Months Ended Dec 31, 1999):
- Operating Margin: 47.7%
- Net Profit Margin: 39.9%
- Cost of Revenue as % of Revenue: 12.4%
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 18% year-over-year for the quarter and 22% for the six-month period. Growth was driven by strong licensing of Microsoft Office 2000 and robust demand in the Asia region.
- Profitability: Net income rose 23% for the quarter and 26% for the six-month period compared to the prior year.
- Investment Income: Investment income surged to $773 million for the quarter (up from $337 million) due to realized gains of approximately $400 million and a larger investment portfolio.
- Operating Expenses: Research and development expenses increased 27% to $911 million, and General and Administrative costs rose significantly to $506 million (from $149 million) due to a legal settlement with Caldera, Inc. and increased legal fees.
- Stock Repurchases: The company repurchased $4.85 billion of common stock in the first six months of fiscal 2000. The buyback program was announced as terminated in January 2000.
- Convertible Preferred Stock: $980 million of convertible preferred stock matured and was converted into common stock in December 1999.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Management expects cash and short-term investments to be sufficient for operating requirements for the next 12 months.
- Future investments will focus on sales, marketing, R&D, and strategic acquisitions.
- Windows 2000 launch is anticipated to impact demand for Windows NT products in the near term.
Risks and Contingencies:
- Antitrust Litigation: Ongoing cases filed by the U.S. Department of Justice and 20 state Attorneys General alleging violations of the Sherman Act. Judge Jackson issued Findings of Fact in November 1999; Conclusions of Law are expected in 2000.
- Sun Microsystems Lawsuit: Dispute regarding Java technology licensing. A preliminary injunction based on unfair competition was partially reinstated in January 2000; Microsoft is in compliance.
- SEC Investigation: The SEC is conducting a non-public investigation into the company's accounting reserve practices.
- Foreign Exchange: Weak European currencies negatively impacted translated revenue, though this was partially offset by a stronger Japanese yen.
Unusual Items:
- Recognized a $156 million gain on the sale of the MSN Sidewalk entertainment city guide to Ticketmaster Online-CitySearch.
- Recorded a charge for the settlement of the Caldera, Inc. lawsuit within General and Administrative expenses.
Investor Verification Checklist
- Antitrust Outcome: Monitor the final Conclusions of Law in the DOJ antitrust case, as injunctive relief could materially alter business operations.
- Windows 2000 Adoption: Verify the pace of corporate adoption for Windows 2000 to assess the recovery of Windows Platforms revenue growth.
- Office 2000 Sustainability: Confirm if the strong revenue growth from Office 2000 licensing is sustainable beyond the initial launch quarter.
- Investment Portfolio: Review the composition and realized gains of the $17.8 billion investment portfolio, as investment income significantly boosted net income.
- Legal Settlements: Track any additional costs related to the Sun Microsystems litigation or the ongoing SEC investigation.