Microsoft Jumps Shark, Posts Earnings Early On Website: Another Glitch?

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From Microsoft (h/t Lizzie)

Redmond, Wash. – Jan. 27, 2011 – Microsoft
Corp. today announced record second-quarter revenue of $19.95 billion for the quarter
ended Dec. 31, 2010. Operating income, net income and diluted earnings per share
for the quarter were $8.17 billion, $6.63 billion and $0.77 per share, respectively.

 

Prior year results reflect the recognition of $1.71 billion of deferred revenue
relating to the Windows 7 Upgrade Option program and sales of Windows 7 before general
availability in October 2009. Second-quarter growth rates for revenue and earnings
per share were 5% and 4% respectively. Without the deferred recognition in the prior
year, second-quarter growth rates for revenue and earnings per share were 15% and
28%, respectively.

 

(In millions, except per share amounts) Three months ended December 31,  
2010 As Reported (GAAP) 2009 As Reported (GAAP) Deferred Revenue Recognition 2009 As Adjusted
(Non-GAAP)
Percentage
Change (GAAP)
Percentage
Change (Non-GAAP)
Revenue $19,953 $19,022 $1,711 $17,311 5% 15%
Operating income $8,165 $8,513 $1,711 $6,802 -4% 20%
Diluted Earnings Per Share $ 0.77 $ 0.74 $0.14 $ 0.60 4% 28%


“We are enthusiastic about the
consumer response to our holiday lineup of products, including the
launch of Kinect. The 8 million units of Kinect sensors sold in just 60
days far exceeded our expectations,” said Peter Klein, chief financial
officer at Microsoft. “The pace of business spending, combined with
strong consumer demand, led to another quarter of
operating margin expansion and solid earnings per share
growth.”
Among the factors driving Microsoft’s record
revenues and earnings per share was the 55% growth in revenue for the
Entertainment & Devices Division, as the success of the Kinect
sensor boosted sales of Xbox 360 consoles, Xbox Live subscriptions and
Xbox games.
Microsoft Business Division revenue grew 24%
year-over-year. Office 2010 is the fastest-selling consumer version of
Office in history, with license sales over 50% ahead of Office 2007 over
an equivalent period following launch.

“Business demand for our productivity and infrastructure
products and cloud solutions is strong. Office had a huge quarter,
exceeding everyone’s expectations, and our roadmap for cloud
productivity with Office 365 makes products like SharePoint, Exchange,
Lync and Dynamics CRM even more attractive to our customers,” said Kevin
Turner, chief operating officer at Microsoft. “Windows 7 continues to
be the fastest-growing operating system in history, and our recent
System on a Chip announcement demonstrates our
commitment that Windows will have the power and flexibility to run
everywhere and on every device.”
   Among the other product and business highlights Microsoft reported in the quarter:

  • Microsoft announced it has now sold over 300 million Windows 7
    licenses, and Windows 7 is now running on over 20% of Internet-connected
    PCs.

  • Windows Phone 7 launched during the quarter in 30 countries and
    on 60
    operators and nine different devices. Microsoft announced
    developers are adding Windows Phone 7 applications to the marketplace at
    a rate
    of over 100 per day.

  • Bing completed the integration of Yahoo! search in the U.S. and Canada and continues to gain share.

  • Windows Azure developer momentum continued this quarter, with
    Pixar Animation Studios, ADP with NVoicePay and others demonstrating
    compelling uses of the platform.

  • Internet Explorer 9 is Microsoft’s fastest downloaded beta browser of all time with over 20 million downloads to date.

  • At International CES 2011 in early January, Microsoft announced that the next version of Windows will support
    System on a Chip architectures.

  • The company announced that during the quarter, it bought back $5 billion in stock and declared $1.3 billion in dividends.

Business Outlook

 

Microsoft reaffirms operating expense guidance of $26.9 billion to $27.3 billion for the full year ending June 30, 2011.

 

Webcast Details

 

Peter Klein, chief
financial officer, Frank Brod, chief accounting officer, and Bill
Koefoed, general manager of Investor Relations, will host a conference
call and webcast at 2:30 p.m. PST (5:30 p.m. EST) today to discuss
details of the company’s performance for the quarter and certain
forward-looking
information. The session may be accessed at
http://www.microsoft.com/investor
. The webcast will be available for replay through the close of business on Jan. 27, 2012.

 


Adjusted Financial Results and Non-GAAP Measures

 

In addition to financial
results reported in accordance with generally accepted accounting
principles (GAAP), we have provided certain non-GAAP financial
information to aid investors in better understanding the company’s
performance. For revenue, operating income and earnings per share growth
we excluded the impact of deferred revenue recognized in the prior year
fiscal quarter relating to the Windows 7 Upgrade Option program and
sales of Windows 7 before general availability in October 2009.
Presenting these measures without the impact of this item gives
additional insight into operational performance and helps clarify trends
affecting the company’s business. For comparability of reporting,
management considers this information in conjunction with GAAP amounts
in evaluating business performance. These non-GAAP financial measures
provided should not be considered as a substitute for, or superior to,
the measures of financial performance prepared in accordance with GAAP.

 


To aid comparability of prior
results, we have also recast certain prior period amounts within our
Form 10-Q that conforms to the way we internally managed and monitored
segment performance during the current fiscal year. In addition to the
reconciliation in this release, our supplementary earnings slide deck at

http://www.microsoft.com/investor
contains a reconciliation of adjusted financial results and a reconciliation between reported and recast segment results.

 


About Microsoft

 

Founded in 1975, Microsoft (Nasdaq “MSFT”)
is the worldwide leader in software, services and solutions that help people and
businesses realize their full potential.

 

##########

 

Forward-Looking Statements

 

Statements in this release that are “forward-looking
statements” are based on current expectations and assumptions that are subject
to risks and uncertainties. Actual results could differ materially because of factors
such as:

 


  • execution and competitive risks in transitioning to cloud-based computing;

  • challenges to Microsoft’s business model;

  • intense competition in all of Microsoft’s markets;

  • Microsoft’s continued ability to protect its intellectual property rights;

  • claims that Microsoft has infringed the intellectual property rights of others;

  • the possibility of unauthorized disclosure of significant portions of Microsoft’s
    source code;

  • actual or perceived security vulnerabilities in Microsoft products that could reduce
    revenue or lead to liability;

  • improper disclosure of personal data could result in liability and harm to Microsoft’s
    reputation;

  • outages and disruptions of services provided to customers directly or through third
    parties if Microsoft fails to maintain an adequate operations infrastructure;

  • government litigation and regulation affecting how Microsoft designs and markets
    its products;

  • Microsoft’s ability to attract and retain talented employees;

  • delays in product development and related product release schedules;

  • significant business investments that may not gain customer acceptance and produce
    offsetting increases in revenue;

  • unfavorable changes in general economic conditions, disruption of our partner networks
    or sales channels, or the availability of credit that affect demand for Microsoft’s
    products and services or the value of our investment portfolio;

  • adverse results in legal disputes;

  • unanticipated tax liabilities;

  • quality or supply problems in Microsoft’s consumer hardware or other vertically
    integrated hardware and software products;

  • impairment of goodwill or amortizable intangible assets causing a charge to earnings;

  • exposure to increased economic and regulatory uncertainties from operating a global
    business;

  • geopolitical conditions, natural disaster, cyberattack or other catastrophic events
    disrupting Microsoft’s business; and

  • acquisitions and joint ventures that adversely affect the business.

  •  

    For further information regarding risks and uncertainties
    associated with Microsoft’s business, please refer to the “Management’s
    Discussion and Analysis of Financial Condition and Results of Operations”
    and “Risk Factors” sections of Microsoft’s SEC filings, including,
    but not limited to, its annual report on Form 10-K and quarterly reports on Form
    10-Q, copies of which may be obtained by contacting Microsoft’s Investor Relations
    department at (800) 285-7772 or at Microsoft’s Investor Relations website
    at http://www.microsoft.com/investor.

     

    All information in this release is as of Jan 27, 2011.
    The company undertakes no duty to update any forward-looking statement to conform
    the statement to actual results or changes in the company’s expectations.

     

    For more information, press only:
    Rapid Response Team, Waggener Edstrom Worldwide, (503) 443-7070,
    rrt@waggeneredstrom.com

     

    For more information, financial analysts and investors
    only:


    Bill Koefoed, general manager, Investor Relations, (425) 706-3703

     

    Note to editors: For more information, news and
    perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news/. Web
    links, telephone numbers and titles were correct at time of publication, but may
    since have changed. Shareholder and financial information, as well as today’s
    2:30 p.m. PST conference call with investors and analysts, is available at http://www.microsoft.com/investor/.

     

    MICROSOFT CORPORATION

     

    INCOME STATEMENTS

    (In millions, except per share amounts) (Unaudited)

     

    Three Months Ended
    December 31,
    Six Months Ended
    December 31,
    2010 2009 2010 2009
    Revenue $19,953 $19,022 $36,148 $31,942
    Operating expenses:
    Cost of revenue

    4,833 3,628 7,972 6,470
    Research and development

    2,185 2,079 4,381 4,144
    Sales and marketing

    3,825 3,619 6,631 6,409
    General and administrative

    945 1,183 1,883 1,924

    Total operating expenses

    11,788 10,509 20,867 18,947

    Operating income 8,165 8,513 15,281 12,995
    Other income 332 370 446 653

    Income before income taxes 8,497 8,883 15,727 13,648
    Provision for income taxes 1,863 2,221 3,683 3,412

    Net income $6,634 $6,662 $12,044 $10,236

    Earnings per share:
    Basic

    $0.78 $0.75 $1.41 $1.15
    Diluted

    $0.77 $0.74 $1.39 $1.14

    Weighted average shares outstanding:
    Basic

    8,497 8,856 8,555 8,885
    Diluted

    8,570 8,951 8,646 8,975

    Cash dividends declared per common share $0.16 $0.13 $0.32 $0.26

     

     

     

    MICROSOFT CORPORATION

     

    BALANCE SHEETS

    (In millions)

     

    December 31, June 30,
    2010
    (Unaudited)
    2010(1)
    Assets
    Current assets:
    Cash and cash equivalents

    $4,023 $5,505
    Short-term investments (including securities loaned of $982 and $62)

    37,229 31,283

    Total cash, cash equivalents, and short-term investments

    41,252 36,788
    Accounts receivable, net of allowance for doubtful accounts
    of $317 and $375
    12,874 13,014
    Inventories 861 740
    Deferred income taxes 2,548 2,184
    Other  2,149 2,950

    Total current assets

    59,684 55,676
    Property and equipment, net of accumulated depreciation
    of $9,279 and $8,629
    7,799 7,630
    Equity and other investments 10,022 7,754
    Goodwill 12,502 12,394
    Intangible assets, net 992 1,158
    Other long-term assets 1,307 1,501

    Total assets

    $92,306 $86,113

    Liabilities and stockholders' equity
    Current liabilities:
    Accounts payable

    $3,863 $4,025
    Short-term debt

    0 1,000
    Accrued compensation

    2,402 3,283
    Income taxes

    1,439 1,074
    Short-term unearned revenue

    12,063 13,652
    Securities lending payable

    1,355 182
    Other

    3,190 2,931

    Total current liabilities

    24,312 26,147
    Long-term debt 9,671 4,939
    Long-term unearned revenue 1,354 1,178
    Deferred income taxes 826 229
    Other long-term liabilities 7,662 7,445

    Total liabilities

    43,825 39,938
    Commitments and contingencies
    Stockholders' equity:
    Common stock and paid-in capital - shares authorized 24,000;   outstanding 8,403 and 8,668
    61,646 62,856
    Retained deficit, including accumulated other comprehensive   income of $1,697 and $1,055
    (13,165) (16,681)

    Total stockholders' equity

    48,481 46,175

    Total liabilities and stockholders' equity

    $92,306 $86,113

    (1) Derived from audited financial statements

     

     

     

    MICROSOFT CORPORATION

     

    CASH FLOWS STATEMENTS

    (In millions)  (Unaudited)

     

      Three Months Ended
    December 31,
    Six Months Ended
    December 31,
    2010 2009 2010 2009
    Operations

    Net income
    $6,634 $6,662 $12,044 $10,236

    Adjustments to reconcile net income to net   cash from operations:
    Depreciation, amortization, and other

    663 615 1,357 1,261
    Stock-based compensation expense

    553 485 1,081 928
    Net recognized gains on investments   and derivatives

    (226) (188) (255) (254)
    Excess tax benefits from stock-based   compensation

    (4) (15) (9) (24)
    Deferred income taxes

    (117) 550 (265) 504
    Deferral of unearned revenue

    6,834 6,926 12,715 13,605
    Recognition of unearned revenue

    (7,301) (9,126) (14,163) (15,363)
    Changes in operating assets and   liabilities:

    Accounts receivable

    (3,270) (2,789) 404 (41)
    Inventories

    380 558 (88) 139

    Other current assets

    (77) 686 131 451

    Other long-term assets

    118 16 180 (62)

    Accounts payable

    216 3 (184) (33)
    Other current liabilities

    (500) 282 (1,411) (921)

    Other long-term liabilities

    283 304 843 650

    Net cash from operations

    4,186 4,969 12,380 11,076

    Financing

    Short-term debt repayments, maturities of   90 days or less, net
    (1,000) (475) (186) (97)

    Proceeds from issuance of debt, maturities   longer than 90 days
    0 1,046 4,721 1,741

    Repayments of debt, maturities longer than   90 days
    0 (573) (814) (1,396)

    Common stock issued
    660 729 837 977

    Common stock repurchased
    (5,052) (3,867) (9,451) (5,407)

    Common stock cash dividends
    paid
    (1,363) (1,152) (2,481) (2,309)

    Excess tax benefits from stock-based   compensation
    4 15 9 24

    Other
    0 0 (25) 0

    Net cash used in financing

    (6,751) (4,277) (7,390) (6,467)

    Investing

    Additions to property and equipment
    (491) (376) (1,055) (811)

    Acquisition of companies, net of cash   acquired
    (69) (63) (69) (102)

    Purchases of investments
    (5,896) (4,287) (13,313) (14,777)

    Maturities of investments
    1,836 1,896 2,706 5,394

    Sales of investments
    2,603 3,361 4,030 7,778

    Securities lending payable
    447 (623) 1,174 1,227

    Net cash used in investing

    (1,570) (92) (6,527) (1,291)

    Effect of exchange rates on cash and cash   equivalents
    (3) (1) 55 28

    Net change in cash and cash equivalents
    (4,138) 599 (1,482) 3,346
    Cash and cash equivalents, beginning of   period
    8,161 8,823 5,505 6,076

    Cash and cash equivalents, end of period
    $4,023 $9,422 $4,023 $9,422

     

     

     

    MICROSOFT CORPORATION

     

    Segment Revenue and Operating Income (Loss)

    (In millions)
    (Unaudited)

     

    Three Months Ended
    December 31,
    Six Months Ended
    December 31,
    2010 2009 2010 2009
    Revenue
     
    Windows & Windows Live Division $5,054 $7,193 $9,839 $10,063
    Server and Tools 4,390 3,978 8,349 7,523
    Online Services Division 691 579 1,218 1,067
    Microsoft Business Division 6,032 4,864 11,157 9,360
    Entertainment and Devices Division 3,698 2,381 5,493 3,815
    Unallocated and other 88 27 92 114

    Consolidated $19,953 $19,022 $36,148 $31,942

    Operating Income (Loss)
     
    Windows & Windows Live Division $3,251 $5,417 $6,573 $6,894
    Server and Tools 1,776 1,464 3,415 2,709
    Online Services Division (543) (463) (1,103) (940)
    Microsoft Business Division 3,965 2,947 7,340 5,744
    Entertainment and Devices Division 679 365 1,067 640
    Corporate-level activity (963) (1,217) (2,011) (2,052)

    Consolidated $8,165 $8,513 $15,281 $12,995