The Growth and Profitability gauges weakened in the September period, which was the first quarter of the company's fiscal 2009, but the Value gauge remained a robust 18 of 25 possible points.
Net Income in the quarter almost exactly matched our expectations, and it was 2.0 percent more than in the year-earlier quarter.
To look ahead, we've modeled Microsoft's Income Statement for the December 2008 quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that Microsoft will announce on, or about, 22 January 2009. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.
Microsoft Corp. (NASDAQ: MSFT), best known for operating system and application software, also sells video game consoles, music players, and computer peripherals. In recent years, Microsoft has increased its role in the online advertising business, in direct competition with Google Inc. (NASDAQ: GOOG).
Earlier this year, Microsoft offered $40+ billion to acquire Yahoo! Inc. (NASDAQ: YHOO). However, the bid was withdrawn when Yahoo's management resisted. A recent decision by Yahoo! co-founder Jerry Yang to step down as CEO did not reawaken Microsoft's interest, according to CEO Steve Ballmer.
Last month, Microsoft joined the elite ranks of non-financial entities with AAA bond ratings, which is the highest S&P grade. After Microsoft's board authorized as much as $6 billion worth of debt, the company established a program allowing issuance of $2 billion of short-term commercial paper. Microsoft also opened a $2 billion revolving credit facility.
Microsoft also initiated a new $40 billion share repurchase program, and the company increased its quarterly dividend by 18 percent.
Management guidance for the December 2008 quarter was included in the press release reporting September's results.
The company forecast Revenue between $17.3 billion to $17.8 billion. We will focus on the mid-point, $17.55 billion, which would be 7.23 percent higher than Revenue in the December 2007 quarter. On a year-over-year basis (i.e., trailing four quarters compared to the four previous quarters), Microsoft's Revenue growth would be 8.6 percent if sales match the guidance.
Microsoft typically achieves a Gross Margin of 80 percent, give or take a few percentage points. Our expectation for the December quarter is a Gross Margin of 81 percent. This ratio translates into a Cost of Goods Sold of (1 - 0.81) * $17.55 billion, or $3.34 billion.
R&D expenses have been averaging around 14 percent of Revenue, but have edged up recently. For the December quarter, we will assume 14.5 percent of Revenue, or 0.145* $17.55 billion = $2.55 billion.
SG&A expenses can fluctuate fairly significantly from quarter to quarter. Our target is 30 percent of Revenue, which is the average over the last four quarters. Therefore, we are looking for SG&A expenses of 0.30 * $17.55 billion = $5.27 billion.
These estimates yield an estimated Operating Income of $6.4 billion, at the high end of the $6.1 billion to $6.4 billion range indicated in Microsoft's guidance. This figure is 1.2 percent below Operating Income in the December 2007 quarter.
We will assume Investment and interest income of $250 million. This would lead to Pre-Tax Income of $6.66 billion.
We'll also assume an income tax rate of 29 percent, which leads to a Net Income value of $4.73 billion ($0.52/share). This is consistent with the company's guidance. Net income was $4.71 billion ($0.50/share) in the year-earlier quarter.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | December 2008 (predicted) | December 2007 (actual) |
| Revenue | | 17,550 | 16,367 |
| Op expenses | | | |
| | CGS | (3,335) | (3,543) |
| | R&D | (2,545) | (1,885) |
| | SG&A | (5,265) | (4,458) |
| | Other | 0 | 0 |
| Operating Income | | 6,406 | 6,481 |
| Other income | | | |
| | Investments | 0 | 0 |
| | Interest, etc. | 250 | 339 |
| Pretax income | | 6,656 | 6,820 |
| Income tax | | (1,930) | (2,113) |
| Net Income | | 4,726 | 4,707 |
| | | $0.52/sh | $0.50/sh |
| Shares outstanding | | 9,100 | 9,503 |
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