10-QPeriod: Q1 FY2008

MICROSOFT CORP Quarterly Report for Q1 Ended Sep 30, 2007

Filed October 25, 2007For Securities:MSFT

Summary

Microsoft Corporation reported strong financial results for the quarter ended September 30, 2007, with significant year-over-year growth in revenue and net income. Revenue increased by 27% to $13.76 billion, while net income rose by 23% to $4.29 billion. Diluted earnings per share also saw a substantial increase, growing to $0.45 from $0.35 in the prior year's comparable quarter. The company's performance was boosted by robust sales across its key segments, notably Client and Server & Tools, which benefited from the continued adoption of Windows Vista and the 2007 Microsoft Office system, as well as strong server product licensing. The Entertainment and Devices Division also showed exceptional growth, nearly doubling its revenue due to strong Xbox 360 console and game sales, including the successful launch of Halo 3. Strategically, Microsoft completed the acquisition of aQuantive, Inc. for $5.9 billion, a move aimed at significantly bolstering its digital marketing and advertising business. Despite increased operating expenses, driven partly by acquisition costs and strategic investments, the company demonstrated strong operating income growth of 32%, reflecting effective cost management and revenue expansion. Microsoft continued its commitment to shareholder returns through share repurchases and dividend payments.

Financial Highlights

5 data points
Beta

Revenue

$13.76B

80.6% Gross Margin

Net Income

$4.29B

31.2% Net Margin

EPS (Diluted)

$0.45

Financial Statements
Beta
Revenue$13.76B
Gross Profit$11.09B
Net Income$4.29B
EPS (Basic)$0.46
EPS (Diluted)$0.45

Key Highlights

  • 1Revenue for the quarter surged by 27% to $13.76 billion compared to the prior year's quarter.
  • 2Net income grew by 23% to $4.29 billion, demonstrating strong profitability.
  • 3Diluted earnings per share increased by 29% to $0.45.
  • 4The company announced the completion of its $5.9 billion acquisition of aQuantive, Inc., a key strategic move into digital marketing.
  • 5Entertainment and Devices Division revenue nearly doubled (91% increase) driven by strong Xbox 360 sales and the launch of Halo 3.
  • 6Client and Server & Tools segments showed solid growth, supported by Windows Vista and Office 2007 adoption and server product licensing.
  • 7Microsoft continued its capital return program, repurchasing shares and declaring dividends.

Frequently Asked Questions

Revenue growth was primarily driven by increased sales in the Client segment, fueled by the licensing of Windows Vista and the 2007 Microsoft Office system, alongside growth in the Server and Tools segment from Windows Server and SQL Server licensing. The Entertainment and Devices Division saw significant growth due to strong Xbox 360 console and game sales, including the successful launch of Halo 3.

The acquisition of aQuantive, Inc. for $5.9 billion was completed in August 2007 and is expected to play a key role in Microsoft's advertising business. While contributing to revenue in the Online Services Business segment, the acquisition also resulted in increased operating expenses, including a $58 million loss from aQuantive in the quarter, which included a $24 million in-process R&D write-off and $30 million in amortization of intangible assets. Goodwill of $5.3 billion was recorded.

Microsoft anticipates continued double-digit revenue growth for the remainder of fiscal year 2008, expecting growth to be higher in the first half of the fiscal year than the second, largely due to product launches in late fiscal year 2007. They project PC shipments to grow between 10% and 12%, and expect the operating income growth rate to continue exceeding the revenue growth rate.

Microsoft is actively managing various legal and regulatory matters, including ongoing competition law cases in Europe and Korea, and patent infringement lawsuits. The company reported that it had reached compliance with the European Commission's 2004 decision and discontinued its appeals in Europe. In Korea, it withdrew its appeal of a ruling concerning market dominance. The company is also managing numerous antitrust class action lawsuits, with settlements reached in many states, estimating the total cost to resolve these cases to be between $1.7 billion and $1.9 billion.