01—Abstract
Summary
Summary of the 10-K filed September 27, 1996. Cited figures are marked; the original filing is the authoritative source.
Microsoft's fiscal 1996 10-K (year ended June 30, 1996) shows a company at the height of the Windows 95 cycle.
Net revenues rose 46% to $8.67 billiona from $5.94 billion, and net income grew 51% to $2.2 billion, or $3.43 per share. Operating income reached $3.08 billion, and the operating margin held at about 35%. Growth was driven by Windows 95 upgrades, Office suite sales, and a rapid expansion of OEM licensing, where OEM channel revenue rose to $2.50 billion.
Management, however, cautioned that the revenue growth rate in the first half of fiscal 1997 may not approach 1996's level, and that operating expenses are expected to rise, which could pressure margins. The balance sheet is strong. Cash and short-term investments reached $6.94 billionb, the company carries no material long-term debt, and stockholders' equity rose to $6.9 billion.
Operating cash flow was $3.72 billionc. Microsoft also repurchased $1.26 billion of its own stock during the year. Research and development spending increased 67% to $1.43 billion, or 16.5% of revenue, reflecting continued heavy investment in Windows NT, the Internet, and online services.
Investors should weigh several risks. Revenue recognition is shifting toward ratable recognition for Windows products because Internet browser updates are bundled into operating system licenses, which defers a portion of revenue. The company is also under a U.S. Department of Justice antitrust inquiry concerning Web browsers, which management does not expect to be materially adverse.
Its newer ventures, including The Microsoft Network, the MSNBC joint ventures, and DreamWorks Interactive, carry expenses but have not yet been material to results. Competition is intensifying in the Internet, browser, and online services markets, notably from Netscape, and the company's effective tax rate rose to 35.0%d.
02—Key points
Key Highlights
- Revenue grew 46% to $8.67 billion in fiscal 1996, driven by Windows 95 and Microsoft Office sales, with OEM channel revenue up to $2.50 billion.
- Net income rose 51% to $2.20 billion, and EPS reached $3.43, compared with $2.32 in fiscal 1995.
- Operating income was $3.08 billion, and the operating margin remained about 35% despite a 67% increase in R&D spending to $1.43 billion.
- Cash and short-term investments totaled $6.94 billion, and Microsoft reports no material long-term debt.
- Operating cash flow was $3.72 billion, and the company repurchased $1.26 billion of its common stock during the year.
- Management expects revenue growth in the first half of fiscal 1997 to slow from the 1996 pace and operating expenses to rise, which may pressure operating margins.
- The DOJ antitrust inquiry into Web browsers and the company's growing Internet and online investments represent the main regulatory and strategic uncertainties.
03—Questions
Frequently Asked Questions
What drove Microsoft's strong revenue growth in fiscal 1996?
Growth was driven mainly by retail and OEM sales of Windows 95, released in August 1995, along with strong sales of 32-bit Microsoft Office versions. Windows 95 upgrade sales were a major factor, reflecting the typical sales pattern for operating system upgrades, and OEM preinstallation on new PCs contributed a steady base.
Is Microsoft carrying meaningful debt or financial risk?
No. The filing states Microsoft has no material long-term debt. It maintains $70 million in standby multicurrency credit lines for foreign currency hedging and international cash management. Its financial position is supported by $6.94 billion in cash and short-term investments, which management considers sufficient for 1997 operating requirements.
Why might revenue growth slow in fiscal 1997?
Management noted that 1996 growth was inflated by Windows 95 upgrades, which may not be repeated at the same level. Additionally, the growing share of revenue recognized ratably over product life cycles, along with higher planned spending on R&D, sales, and support, could limit near-term growth and reduce operating margins.
What legal or regulatory risks did the filing disclose?
The U.S. Department of Justice's Antitrust Division requested information from Microsoft in September 1996 concerning Web browsers as part of an ongoing investigation. Management believes the matter will not have a material adverse effect on financial position or results. The filing also notes general litigation risks around intellectual property, patents, and government regulation.
What are Microsoft's new strategic investments, and how do they affect results?
The company has invested in The Microsoft Network (80% owned, with TCI owning 20%), the 50%-owned MSNBC cable and online news joint ventures with NBC (Microsoft agreed to pay $220 million over five years for the cable venture), and 50%-owned DreamWorks Interactive. Joint venture operating losses are recorded in nonoperating expenses, and management characterized these operations as not yet material to consolidated results.
04—Continue