How did Microsoft's fiscal 2000 financial performance compare with prior years?

Revenue reached $22.96 billion, up 16% from $19.75 billion, which is a slower pace than the 29% growth in fiscal 1999. Net income increased 21% to $9.42 billion, and diluted EPS rose to $1.70 from $1.42. Growth slowed mainly because of soft business PC demand, a shift to lower-priced licenses, and a longer migration cycle for Windows 2000.

What is the status of the antitrust case, and what could it mean for investors?

On June 7, 2000, the District Court entered a final judgment ordering a breakup into an operating systems business and an applications business, along with conduct remedies. The judgment was stayed pending appeal, and the Supreme Court is considering whether to accept jurisdiction. Management believes it will ultimately obtain relief but cannot predict the timing or extent. It states that failing to obtain relief from certain provisions would likely have a material adverse effect.

Is Microsoft's balance sheet strong enough to fund its growth initiatives?

Yes. Cash and short-term investments were $23.80 billion, and the company reports no material long-term debt. Operating cash flow was $13.96 billion in fiscal 2000. Management expects existing cash plus operating cash flow to cover operating needs, leaving funds for strategic investments, acquisitions, and share repurchases.

What are the main risks to Microsoft's future earnings mentioned in the filing?

Key risks include the antitrust remedy, rapid technological change and competition from open-source software and Web-based platforms, lower-cost PCs and handheld devices that may carry less Microsoft software, saturation of desktop applications in large organizations, price pressure, and rising R&D spending on initiatives such as .NET, which may not produce significant revenue for years.

MSFT 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 28, 2000. Cited figures are marked; the original filing is the authoritative source.

Microsoft's fiscal 2000 10-K (year ended June 30, 2000) shows a company still growing strongly but with clear signs of deceleration.

Revenue rose 16% to $22.96 billion^a (from $19.75 billion), while net income climbed 21% to $9.42 billion and diluted EPS reached $1.70. Operating income was $10.94 billion, and the operating margin narrowed slightly as research and development ($3.78 billion, 16.4% of revenue) and sales and marketing costs grew faster than sales. Investment income of $3.18 billion, up from $1.80 billion, contributed materially to pre-tax income, so investors should note that a meaningful part of earnings came from the investment portfolio rather than core operations.

Management flagged slow business PC demand, lower average revenue per license, and a shift toward licensing and subscriptions as headwinds, and warned that operating margins in fiscal 2001 may decline. Balance sheet strength is a major positive. Cash and short-term investments reached $23.80 billion, stockholders' equity rose to $41.37 billion^b, and the company reports no material long-term debt.

Operating cash flow was $13.96 billion^c. However, the company also faces a large overhang from the U.S. government antitrust case. The June 7, 2000 judgment ordered a breakup into an operating systems business and an applications business.

That judgment is stayed pending appeal, but management acknowledges that failing to obtain relief from certain provisions would likely have a material adverse effect. Additional class actions, EU proceedings, and a non-public SEC inquiry into accounting reserve practices add to the legal risk profile. For investors, the filing describes a company with dominant franchises in Windows and Office, a rapidly growing server business, and a large but still loss-making consumer and online segment.

Its .NET strategy is expected to increase R&D without corresponding near-term revenue growth. Taken together, the report points to a financially robust company whose near-term earnings quality and long-term structure both depend on the outcome of the antitrust appeal and its ability to convert new initiatives into revenue.

02—Key points

Key Highlights

Revenue grew 16% to $22.96 billion in fiscal 2000, down from 29% growth in fiscal 1999, with slower OEM Windows sales and softer business PC demand.
Net income rose 21% to $9.42 billion, and diluted EPS increased to $1.70 from $1.42.
Cash and short-term investments totaled $23.80 billion at June 30, 2000, with no material long-term debt and stockholders' equity of $41.37 billion.
Investment income surged to $3.18 billion from $1.80 billion, making a significant contribution to pre-tax earnings alongside operating income of $10.94 billion.
Research and development spending reached $3.78 billion (16.4% of revenue), with management indicating further increases in R&D without matching near-term revenue growth.
The June 2000 antitrust judgment orders a breakup into two companies. The judgment is stayed pending appeal, but the outcome carries material uncertainty.
Management expects fiscal 2001 revenue growth and operating margins may decline from fiscal 2000 levels, and it is rolling out the .NET strategy as the company's largest initiative.

03—Questions

Frequently Asked Questions

How did Microsoft's fiscal 2000 financial performance compare with prior years?
Revenue reached $22.96 billion, up 16% from $19.75 billion, which is a slower pace than the 29% growth in fiscal 1999. Net income increased 21% to $9.42 billion, and diluted EPS rose to $1.70 from $1.42. Growth slowed mainly because of soft business PC demand, a shift to lower-priced licenses, and a longer migration cycle for Windows 2000.
What is the status of the antitrust case, and what could it mean for investors?
On June 7, 2000, the District Court entered a final judgment ordering a breakup into an operating systems business and an applications business, along with conduct remedies. The judgment was stayed pending appeal, and the Supreme Court is considering whether to accept jurisdiction. Management believes it will ultimately obtain relief but cannot predict the timing or extent. It states that failing to obtain relief from certain provisions would likely have a material adverse effect.
Is Microsoft's balance sheet strong enough to fund its growth initiatives?
Yes. Cash and short-term investments were $23.80 billion, and the company reports no material long-term debt. Operating cash flow was $13.96 billion in fiscal 2000. Management expects existing cash plus operating cash flow to cover operating needs, leaving funds for strategic investments, acquisitions, and share repurchases.
What are the main risks to Microsoft's future earnings mentioned in the filing?
Key risks include the antitrust remedy, rapid technological change and competition from open-source software and Web-based platforms, lower-cost PCs and handheld devices that may carry less Microsoft software, saturation of desktop applications in large organizations, price pressure, and rising R&D spending on initiatives such as .NET, which may not produce significant revenue for years.

04—Continue

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