10-QPeriod: Q2 FY2003

MICROSOFT CORP Quarterly Report for Q2 Ended Dec 31, 2002

Filed January 31, 2003For Securities:MSFT

Summary

Microsoft Corporation reported strong financial performance for the second quarter and first six months of fiscal year 2003, ending December 31, 2002. Revenue saw a notable increase of 10% year-over-year for the quarter and 17% for the six-month period, driven by growth in Xbox sales, recognition of deferred revenue from multi-year licensing, and robust server software sales. Net income also showed significant growth, reflecting operational efficiencies and strong sales performance. The company's financial position remains robust, with substantial cash and short-term investments totaling $43.42 billion. This strong liquidity, coupled with positive operating cash flow, provides ample resources for continued investment in R&D, strategic acquisitions, and shareholder returns, including an increased share repurchase program. Investors should note the company's proactive approach to managing its financial health and its strategic investments in future growth areas.

Key Highlights

  • 1Revenue increased by 10% to $8.54 billion for the quarter and 17% to $16.29 billion for the six months, signaling strong top-line growth.
  • 2Net income rose to $2.55 billion for the quarter and $5.28 billion for the six months, indicating improved profitability.
  • 3Cash and short-term investments reached $43.42 billion, highlighting significant financial flexibility.
  • 4Operating cash flow was robust at $8.94 billion for the six months, demonstrating strong cash generation from core operations.
  • 5Significant increase in share repurchases, with $4.0 billion spent in the first six months, indicating a commitment to returning capital to shareholders.
  • 6Home and Entertainment segment revenue surged by 38% due to strong Xbox sales, indicating successful market penetration for the gaming console.
  • 7The company announced a two-for-one stock split, signaling confidence in future growth and aiming to make shares more accessible.

Frequently Asked Questions

Revenue growth was primarily driven by increased sales of Microsoft Xbox video game consoles, the recognition of unearned revenue from strong multi-year licensing in prior periods, and licensing of Microsoft Windows Server and Server Applications. Growth in the 'Home and Entertainment' segment, largely due to Xbox sales, was particularly strong.

Microsoft's cash and short-term investments totaled $43.42 billion as of December 31, 2002. Operating cash flow was strong at $8.94 billion for the first six months of fiscal 2003. The company believes its existing cash, short-term investments, and operational cash flow are sufficient to meet its operating requirements and fund strategic initiatives, including investments, acquisitions, and share repurchases.

Microsoft is involved in various legal proceedings, including antitrust lawsuits from the U.S. Department of Justice and state Attorneys General, as well as patent infringement cases. While Microsoft believes these matters, individually or in aggregate, will not have a material adverse impact, it has established a contingent liability. For example, a proposed settlement in California class-action lawsuits involves $1.1 billion in vouchers, and the company revised its estimate for resolving these cases to $870 million. The company intends to vigorously defend itself in all ongoing litigation.

Microsoft has significantly increased its share repurchase program, spending $4.0 billion in the first six months of fiscal 2003 compared to $1.3 billion in the prior year period. Additionally, the Board of Directors declared an annual dividend of $0.16 per share (pre-split), payable in March 2003. The company also announced a two-for-one stock split, effective for shareholders of record in late January 2003.