10-QPeriod: Q1 FY2012

MICROSOFT CORP Quarterly Report for Q1 Ended Sep 30, 2011

Filed October 20, 2011For Securities:MSFT

Summary

Microsoft Corporation reported solid financial results for the first quarter of fiscal year 2012, with revenue increasing by 7% year-over-year to $17.37 billion and operating income rising by 1% to $7.20 billion. Diluted earnings per share saw a 10% increase, reaching $0.68, up from $0.62 in the prior year's comparable quarter. This growth was primarily driven by strong sales in the Microsoft Business Division (Office suite) and the Server and Tools segment, which experienced a 10% revenue increase. The company's balance sheet remains robust, with cash, cash equivalents, and short-term investments totaling $57.4 billion as of September 30, 2011. Microsoft also continues to return capital to shareholders, having repurchased $1.0 billion in stock during the quarter and declaring a dividend of $0.20 per share. The acquisition of Skype for $8.6 billion, announced shortly after the quarter's end, signals a strategic move into real-time communications, expected to enhance their video and voice offerings.

Financial Highlights

52 data points
Beta

Revenue

$17.37B

78.3% Gross Margin

Net Income

$5.74B

33.0% Net Margin

EPS (Diluted)

$0.68

Total Assets

$107.42B

Cash & Equivalents

$12.88B

Free Cash Flow

$8.06B

Financial Statements
Beta
Revenue$17.37B
Cost of Revenue$3.78B
Gross Profit$13.60B
R&D Expenses$2.33B
Operating Expenses$6.39B
Operating Income$7.20B
Interest Expense$94.00M
Net Income$5.74B
EPS (Basic)$0.68
EPS (Diluted)$0.68
Shares Outstanding (Basic)8.39B
Shares Outstanding (Diluted)8.49B

Key Highlights

  • 1Revenue grew 7% to $17.37 billion, driven by strong performance in the Microsoft Business Division (Office) and Server and Tools.
  • 2Operating income increased 1% to $7.20 billion, despite a 20% rise in cost of revenue, largely due to increased royalty costs and traffic acquisition costs.
  • 3Diluted EPS rose 10% to $0.68, reflecting both improved net income and significant share repurchases.
  • 4Cash, cash equivalents, and short-term investments stood at a substantial $57.4 billion, indicating strong liquidity.
  • 5Microsoft continued its capital return program, repurchasing $1.0 billion in common stock and paying a $0.20 per share dividend.
  • 6The company experienced a lower effective tax rate of 21% compared to 25% in the prior year, primarily due to a higher mix of earnings from lower-taxed foreign jurisdictions.
  • 7A significant subsequent event was the announced acquisition of Skype for $8.6 billion in cash, aimed at bolstering their communications portfolio.

Frequently Asked Questions

Revenue growth was primarily driven by strong sales of the 2010 Microsoft Office system within the Microsoft Business Division and continued growth in the Server and Tools segment, which benefited from increased adoption of its platform applications and Enterprise Services.

While revenue increased, operating expenses also rose, particularly the cost of revenue which grew by 20%. This increase was attributed to higher Xbox content royalty costs, increased headcount-related expenses (especially in Enterprise Services), and higher traffic acquisition costs for online offerings. These increased costs offset some of the revenue gains, leading to a more modest 1% increase in operating income.

Microsoft maintained a very strong liquidity position with $57.4 billion in cash, cash equivalents, and short-term investments. The company actively returned capital to shareholders through $1.0 billion in share repurchases and by paying a $0.20 per share dividend. The substantial cash allows for strategic investments, such as the then-announced acquisition of Skype, and flexibility in managing its capital structure.

Microsoft is engaged in several ongoing legal matters, including antitrust and patent litigation, with potential for significant financial impact, though management believes current reserves are adequate. Tax-wise, the company is under audit by the IRS for several tax years, with proposed adjustments related to transfer pricing that could be material if not resolved favorably. The effective tax rate was lower due to a higher mix of foreign earnings.