The Value gauge was the laggard at only six points. Valuation metrics were pressured by the 19.2 percent rise during 2007 in Microsoft's share price, which closed the year at $35.60. The shares lost ground in early February when Microsoft's $44 billion bid for Yahoo became public.
The company forecast that Revenue in the just-concluded quarter (the third of Microsoft's fiscal 2008) would be in the range of $14.3 to $14.6 billion. The mid-point, $14.45 billion, which is the figure we will use, is essentially identical to the $14.398 billion of Revenue in the March 2007 quarter. The earlier quarter included the long-delayed release of the Vista operating system.
On a year-over-year basis (i.e., trailing four quarters compared to the four previous quarters), Microsoft's Revenue growth would be 17 percent if sales in the March 2008 quarter match the guidance.
Microsoft's Gross Margin is typically around 80 percent (!). In the year-earlier quarter, it was especially high at 85 percent, which makes comparisons challenging. We're going to be more conservative, and set Gross Margin expectations for the March 2008 quarter at 80 percent. This ratio translates into a Cost of Goods Sold of (1 - 0.08) * $14.45 billion, or $2.9 billion. Given where Microsoft is in the product development cycle, it's not surprising that Microsoft's R&D expenses, as a percentage of Revenue, have edged down a few percentage points. We will assume 13 percent for R&D expenses in the March quarter, which would be $1.88 billion. SG&A expenses are more volatile, but they have recently been averaging about 28 percent of Revenue. This would equate to 0.28 * $14.45 billion = $4.05 billion, for the March quarter.
These estimates yield an estimated Operating Income of $5.64 billion, which is consistent (not coincidentally) within the $5.6 to $5.7 billion range indicated in Microsoft's guidance.
The reduction in Microsoft's cash hoard due to share repurchases may have cut into investment and interest income. We'll assume net other income of $325 million.
We'll also assume an income tax rate of 30 percent, which leads to a Net income value of $4.17 billion ($0.44/share). This matches the company's guidance of $0.43 to $0.45 per diluted share. Net income was $4.926 billion ($0.50/share) in the year-earlier quarter.
| ($M) | March 2008 (predicted) | March 2007 (actual) | |
| Revenue | 14450 | 14398 | |
| Op expenses | |||
| CGS | (2890) | (2140) | |
| R&D | (1878) | (1750) | |
| SG&A | (4046) | (3919) | |
| Other | 0 | 0 | |
| Operating Income | 5635 | 6589 | |
| Other income | |||
| Investments | 0 | 0 | |
| Interest, etc. | 325 | 382 | |
| Pretax income | 5960 | 6971 | |
| Income tax | (1788) | (2045) | |
| Net Income | 4172 | 4926 | |
| $0.44/sh | 0.26/sh | ||
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