The March 2009 quarter was the first for Microsoft in which Revenue was less (5.6 percent less) than in the same quarter of the preceding year. Microsoft, in its 10-Q report, blamed the lower sales on "continued weakness in the global PC market and the recessionary economic environment."
Despite these challenges, Microsoft did a good job trimming its costs. The Gross Margin, at a robust 79.4 percent, weakened only slightly even though sales decreased. Research and Development and Sales, General, and Administrative expenses were much lower than we had anticipated. However, the quarter also included a $290 million charge for employee severance costs and a $452 million loss on equity investments. As a result, Net Income was 32 percent less than in the March 2008 quarter.
We have now modeled Microsoft's Income Statement for fiscal 2009's fourth quarter, which will end on 30 June 2009. The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce on 23 July. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.
First, we present some background information.
A high-tech Goliath, Microsoft is best known for operating system and application software, but the company also sells video game consoles, music players, and computer peripherals.
Financially strapped businesses and consumers are buying fewer personal computers, which results in more meager sales of Windows and other Microsoft software. Microsoft has responded to this situation by aggressive cost cutting, which will include the phased elimination of up to 5000 jobs.
Inexpensive netbook PCs are selling well, but these devices bring less Revenue to Microsoft than more capable computers. Most netbooks run an older, low-priced version of Windows, and some run Linux.
A release candidate version of Windows 7 is available as a free download. The official version of this operating system will become available on 22 October 2009, at which time the disappointing Windows Vista will be put to rest. A "starter edition" of Windows 7 is being developed for netbooks.
The company's dominance in software has brought it considerable attention from antitrust authorities in the U.S. and globally. Federal oversight of Microsoft's 2002 antitrust settlement has been extended for another 18 months. In Europe, Microsoft has been charged with unfairly bundling its Internet Explorer web browser with Windows.
Microsoft has invested considerably to increase its revenue from online advertising, including ads associated with searches. However, comScore's April 2009 ranking of U.S. search engines shows that Google (NASDAQ: GOOG) conducted 64.2 percent of searches and Microsoft sites were used for only 8.2 percent of searches. To improve its prospects in this area, Microsoft has introduced the new Bing search engine. The company is reportedly planning to spend $100 million to advertise this tool.
Microsoft might also try again to acquire Yahoo! Inc. (NASDAQ: YHOO).
In September 2008, Microsoft joined the elite ranks of non-financial entities with AAA bond ratings, which is the highest S&P grade. The company recently sold $3.75 billion in bonds.
Microsoft also authorized its second $40 billion share repurchase program in September 2008.
Now, we are ready to look ahead.
In the press release reporting the results from the March period, Microsoft only provided the following guidance:
Microsoft offers updated operating expense guidance of $26.7 billion to $26.9 billion, including severance charges, for the full year ending June 30, 2009.
Until recently, each Microsoft earnings release had provided quantitative guidance for future Revenue and Earnings per Share. The decision to discontinue this practice was attributed to "the volatility of market conditions going forward."
During the conference call that followed the last earnings release -- click here for the Seeking Alpha transcript -- Microsoft's management described the various factors that drive the corporation's Revenue. For example, the number of traditional (non-netbook) PCs shipped is an important driver. Similarly, the proportion of "annuity" licenses businesses renew is another key factor.
Worldwide PC shipments fell in the first quarter of 2009. If you look at IDC's report, the decline was 7.1 percent. Gartner's estimate was 6.5. Under these conditions, Microsoft's Revenue fell 5.6 percent.
Semiconductor data suggest to us that the PC sales decline is moderating, if just slightly. While we hope to get more definitive sales data for the second quarter to date, we are now setting our target for Microsoft's Revenue in the June 2009 quarter at $15.0 billion. This figure is 5.3 percent below the Revenue of $15.84 in the June 2008 quarter.
Microsoft typically achieves a lucrative Gross Margin of 80 percent, give or take a few percentage points. We expect the margin to slip towards the lower end of the range because of the weak sales environment and the growing proportion of netbooks. Our specific Gross Margin target is 78 percent. This ratio translates into a Cost of Goods Sold of (1 - 0.78) * $15.0 billion, or $3.3 billion.
The company's guidance for Operating Expenses in fiscal 2009 is about $26.8 billion. This figure covers R&D expenses and SG&A expenses. (We group Sales & Marketing and General & Administrative into one category, but Microsoft reports them separately.) Given the actual figures for these expenses in first three quarters of the fiscal year, we estimate that the values for the June quarter will be about $2.4 billion for R&D, $4.7 billion for SG&A, and $300 million for other operating expenses.
The Revenue and expense estimates above would result in Operating Income of $4.3 billion for the June 2009 quarter. This figure is 24 percent below Operating Income in the June 2008 quarter.
We assume, with little certainty, a net non-operating expense (e.g., interest) about $200 million. We'll also assume an income tax rate of 26.5 percent. The values would lead to Net Income of $3.0 billion ($0.34/share). This is 30 percent below Net income in the year-earlier quarter.
Please note that the Income Statement presentation format we use for all analyses may differ in material respects from company-used formats and terminology. 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.
Click here for the full spreadsheet.
Full disclosure: Long MSFT at time of writing.
Posts
No comments:
Post a Comment