MSFT FY 1st quarter results by D Klein – 11/03/09

Microsoft posted revenue of $12.92 billion for the first quarter ended Sept. 30, 2009, a 14% decline from the same period of the prior year but easily exceeding estimates of $12.4 billion.  Operating income, net income and diluted earnings per share for the quarter were $4.48 billion, $3.57 billion and $0.40 per share (compared to expectations of $0.32 per share), which represented declines of 25%, 18% and 17%, respectively, when compared with the prior year period.  So what’s so good about this?  For one they blew away expectations in a weak macroeconomic environment. The above numbers do not include Windows 7 revenue which is deferred to the next quarter or about $1.5 billion. 

Q1 represented the highest number of Windows licenses sold in one quarter ever and September was the highest single month of Windows unit sales ever.  Client revenues declined from last year but this excludes deferred revenue.  This division should do very well going forward.

Server and Tools.  Market conditions generally remain unchanged from last Q. Revenues were up about 0.5% year over year.

Online Services Division.  Bing continues to gain share albeit the numbers are still small but the trend is positive.  Advertising rates continue to decline but rates appear to be stabilizing.  The Yahoo deal is cycling through the regulatory review process and isn’t expected to be approved until early 2010.  Any revenues from this deal probably won’t show up for another two quarters at least.  Seasonally this appears to be the weakest quarter.  Revenues dropped about 5.7% year over year.

Microsoft business division down 11 percent, due to declines in both business and consumer spending.  Its believed this quarter could mark the bottom of the economic downturn.  We’ll know next quarter.  In addition the launch of Office 2010 should have a positive impact on this division.

Entertainment and devices division. console revenue was down, overall gaming revenue was up almost $100 million. Bottom line revenues were flat.

The outlook, based on the transcript (& edited):
Industry assumptions: In conversations with CIOs, many remain cautious about existing budgets, and spending through the end of this calendar year. However, we believe calendar 2010 has the potential for improvement.

Given the industry backdrop we’re extremely well positioned due to the strongest product cycle in our company’s history, and also continue to believe that we will exit the economic reset a much stronger, more focused, and cost efficient company.

Segment expectations:
in the second quarter we expect Windows Division revenue, excluding the impact of the Windows 7 upgrade program, to be in line with overall PC market growth.
With the launch of Windows 7, we expect inventory to rebuild in the channel, and an increase in retail sales. This should offset the three hardware trends we’ve seen in recent quarters, which are netbooks growing faster than non-netbook PCs, consumer PCs growing faster than business PCs, and emerging markets growing faster than developed markets.

In the second quarter we expect to recognize virtually all of the $1.7 billion of Windows 7 Upgrade revenue deferrals from the last two quarters. For the balance of the fiscal year we expect Windows Division revenue to remain in line with, or slightly ahead of the overall PC market growth, with the main variable being the pace of business PC improvement.

We see the potential for a corporate PC refresh cycle beginning in calendar year 2010, although it could be gradual and occur over a couple of years. We also expect the netbook mix to stabilize over the course of the year.

In the second quarter we expect Microsoft Business Division dynamics and revenue trends to be largely the same as they were in the first quarter, with growth lagging PC shipments.  MBD results should improve when we start to see business spending recover, combined with the impact of Office 2010.

The Server and Tool Business is most closely aligned to enterprise spend. We expect the server shipment trend to gradually start to improve towards the end of our fiscal year.

In the Entertainment and Devices Division, although we realized upside from our first party games in the first quarter, remember we released two significant titles in the second quarter of last year, which should cause difficult year-over-year comparisons. We, therefore, expect E&D revenue to decline several points in the second quarter, but we expect the full-year revenue to be roughly flat, as price cuts taken in August are offset by attach revenue and a larger console install base.

Turning to cost of goods sold, driving cost out of our operations, plus a more favorable revenue mix, resulted in a better performance there. And we now expect COGS as a percentage of revenue to increase only one point this year.

With operating expenses, we also continue to make excellent progress. We’re lowering our guidance for the full year to a range of $26.2 to $26.5 billion down from what we said in July. This decrease has also absorbed an additional $100 to $200 million of Yahoo! integration costs should the deal pass regulatory review. We will continue to look for additional cost savings opportunities both in cost of goods sold and in operating expenses through the rest of the fiscal year. We expect CAPEX to be at most $2 billion for the year, and the tax rate to be 25 percent.

Overall Microsoft is poised for a return to growth on both top and bottom lines but what I really like is it appears management is finally getting serious about controlling costs. Operating costs dropped to about 8.4B for the current quarter and MSFT forecasts costs to drop to about $26.4B for 2010 or an average of $6.6B per quarter compared the the current $8.4B

In addition they resumed the share buyback program with 1.4 billion shares repurchased in the quarter. All in all, extremely positive from an investment standpoint going forward IMO.

First Quarter Form 10-Q
View the PowerPoint
View the Transcript

Trailing 12 month revenue – millions                          
SEGMENT/Period Ending       06/07 09/07 12/07 03/08 06/08 09/08 12/08 03/09 06/09 09/09
Client       14,965 15,695 17,360 16,114 16,771 17,004 16,652 16,023 14,772 13,114
Server and Tools       11,175 11,581 11,995 12,478 13,122 13,637 14,119 14,348 14,137 14,154
Online Services Business       2,472 2,607 2,845 3,066 3,214 3,063 3,066 2,944 2,838 2,808
Microsoft Business Division       16,380 17,065 18,368 18,266 18,920 19,766 19,827 19,601 18,899 18,349
Entertainment and Devices Division       6,089 7,007 7,115 7,760 8,186 8,150 8,257 8,232 7,831 7,830
Unallocated and other       41 118 215 270 207 98 59 26 (41) 41
Consolidated       51,122 54,073 57,898 57,954 60,420 61,718 61,980 61,174 58,436 56,296


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