10-QPeriod: Q3 FY2014

MICROSOFT CORP Quarterly Report for Q3 Ended Mar 31, 2014

Filed April 24, 2014For Securities:MSFT

Summary

Microsoft Corporation's (MSFT) 10-Q filing for the period ending March 30, 2014, reveals a stable top line with revenue largely flat year-over-year for the third quarter, totaling $20.4 billion. However, a significant increase in the cost of revenue, particularly related to higher volumes of Xbox and Surface sales and increased datacenter expenses, led to a decrease in operating income by 8% to $6.97 billion. Diluted earnings per share also saw a decline of 6% to $0.68. For the nine-month period, revenue grew by 9% to $63.45 billion, with operating income increasing by 3% to $21.28 billion, and diluted EPS rising by 5% to $2.08. The company highlighted strong growth in its Cloud Services revenue, which doubled, and substantial increases in its Devices and Consumer Hardware segment, driven by new product launches like Xbox One and Surface. The balance sheet shows a substantial increase in cash, cash equivalents, and short-term investments, reaching $88.4 billion. The company also managed its debt effectively, with long-term debt increasing to $22.7 billion, largely due to strategic issuances in late 2013. Microsoft continued its commitment to returning capital to shareholders through share repurchases totaling $1.8 billion in the quarter and $5.3 billion year-to-date, alongside consistent dividend payments. The company is on track to close the significant acquisition of Nokia's Devices and Services business on April 25, 2014, which is expected to further shape its devices and services strategy.

Financial Statements
Beta
Revenue$20.40B
Cost of Revenue$5.98B
Gross Profit$14.43B
R&D Expenses$2.74B
Operating Expenses$7.45B
Operating Income$6.97B
Interest Expense$175.00M
Net Income$5.66B
EPS (Basic)$0.68
EPS (Diluted)$0.68
Shares Outstanding (Basic)8.28B
Shares Outstanding (Diluted)8.37B

Key Highlights

  • 1Revenue for the third quarter remained stable at $20.4 billion, while nine-month revenue increased by 9% to $63.45 billion.
  • 2Operating income decreased by 8% in the third quarter to $6.97 billion, largely due to a 24% increase in cost of revenue driven by higher sales volumes of Xbox and Surface and increased datacenter expenses.
  • 3Diluted Earnings Per Share (EPS) for the third quarter was $0.68, down 6% from the prior year's $0.72.
  • 4Cloud Services revenue doubled, demonstrating strong momentum in Microsoft's strategic shift towards cloud-based offerings.
  • 5The Devices and Consumer Hardware segment saw significant revenue growth of 41% in the quarter, driven by strong sales of Xbox One and Surface devices.
  • 6Total cash, cash equivalents, and short-term investments increased to $88.4 billion, providing substantial liquidity.
  • 7Microsoft continued to return capital to shareholders through $1.8 billion in share repurchases during the quarter and consistent dividend payments.

Frequently Asked Questions

Microsoft reported stable revenue for the third quarter of fiscal year 2014, totaling $20.4 billion, a slight decrease of 0% compared to the prior year. However, operating income decreased by 8% to $6.97 billion, and diluted EPS fell by 6% to $0.68. The nine-month period showed stronger growth with revenue up 9% to $63.45 billion and operating income up 3% to $21.28 billion.

The decrease in quarterly profitability was primarily driven by a significant increase in the cost of revenue, which rose by 24%. This was attributed to higher sales volumes of Xbox and Surface devices, increased datacenter expenses, and changes in product mix. While revenue remained flat, higher costs impacted the bottom line.

The company reported strong progress in its cloud strategy, with Cloud Services revenue doubling. This growth is a key positive indicator for the company's future direction and its transition to subscription-based and service-oriented revenue models.

While the acquisition was expected to close shortly after this reporting period (April 25, 2014), the financial statements reflect the company's intention and preparations, including providing $2.0 billion in financing to Nokia in the form of convertible notes, which are classified as short-term investments. The full financial integration and impact will be reflected in future filings.

Microsoft maintains a very strong liquidity position, with cash, cash equivalents, and short-term investments reaching $88.4 billion. The company also strategically increased its long-term debt to $22.7 billion, primarily to take advantage of favorable market conditions and fund general corporate purposes, including potential acquisitions and capital expenditures.