WPI: Earnings Announcement 2009-1Q

Watson Pharmaceuticals, Inc. (NYSE: WPI) earned $0.42 per share during the three months that ended on 31 March 2009.

The spreadsheet below compares the actual results to our Income Statement model of Watson.  Please note that our arrangement of data may differ in material respects from the company's presentation.

Better-than-expected Revenue was balanced by greater Sales, General and Administrative costs We will post a thorough evaluation soon.


http://sheet.zoho.com/public/ncarvin/wpi-income-statement-2009q1?mode=html

BP: Financial Analysis through March 2009

BP earned a profit of $0.81/ADR, down from $2.25, during the three months that ended 31 March 2009.  This post provides the GCFR analysis of the result, which wasn't nearly as bad as our $0.53 estimate.


First, we present some background information.

BP p.l.c. (NYSE: BP) is the third-largest Major Integrated Oil & Gas company when assessed by Revenue, and it ranks fifth by Market Capitalization.  Other majors include Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips (NYSE: COP).

Energy prices (and, therefore, sales by energy producers) surged in 2007 and the first half of 2008.  The price of crude oil exceeded $140 per barrel at its peak.  The global economy then began to slow, and speculators exited the market.  Crude oil plunged below $40 by the end of the year.  Oil now sells for about $50 per barrel.

The situation was similar with natural gas prices, but the current price remains near a multi-year low.


The former British Petroleum became a behemoth by acquiring both Amoco and Arco.  These transactions also made BP a significant operator of Alaskan oil fields and pipelines.  More recently, in separate transactions totaling $3.65 billion, BP paid Chesapeake Energy (NYSE: CHK) for a stake in Arkansas's Fayetteville Shale field and an interest in Oklahoma's gas-producing shale properties.

The energy price roller coaster has not been the only challenge BP has faced in the last few years.  The company has suffered through tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change.  The U.S. recently sued BP for two oil spills in 2006 into Prudhoe Bay.  In this case, BP is accused of failing to take spill-prevention measures mandated by the Clean Water Act.

A more recent tragedy occurred in April 2009 when a helicopter operated on behalf of BP crashed while returning to Scotland from an offshore oil field.  Sixteen lives were lost.

BP and its Russian partners in the TNK-BP joint venture agreed, after much wrangling, to settle their dispute by appointing a new board and new BP-nominated, Russian-approved CEO.  However, TNK-BP is still operating without a new CEO.  One candidate appeared to be on track, but his appointment was halted.  The Russian partners might not be in a big rush for a new CEO to be seated.

Conditions in the energy market, including lower refining margins hurt BP more than we anticipated in late 2008.  Revenue in last year's fourth quarter was 40 percent less than in the third quarter, and it was 23 percent less than in the fourth quarter of 2007.  Production in the December 2008 quarter was only 1 percent higher than in December 2007 period. 

The fourth quarter of 2008 included $1.62 billion in charges for "Impairment and losses on sale of businesses and fixed assets."  In addition, TNK-BP was responsible for a $682 million loss.  The loss, according to BP, "reflected the impact of the calculation lag on Russian export duties in the falling price environment and several asset impairments."  And, BP wrote-down its investment in Rosneft (MCX: ROSN) by $517 million, to reflect market value.

These results in late 2008 cut the Growth gauge by 7 points and the Value gauge by 3 points.  The GCFR Overall Gauge slipped from 76 to 65 points of the 100 possible points. 


Now, with the available data from the March 2009 quarter, our gauges display the following scores:

• Cash Management: 12 of 25 (unchanged from December)
  
• Growth: 9 of 25 (down from 18)
  
• Profitability: 7 of 25 (down from 11)
  
• Value: 20 of 25 (up/down from 22)
  

• Overall: 53 of 100 (up/down from 65)
  

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement with our previously communicated expectations. 

BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union.  Reports prior to 2006 complied with UK Generally Accepted Accounting Principles. 

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.


http://sheet.zoho.com/public/ncarvin/bp-income-statement-2009q1?mode=html

First-quarter Revenue (i.e., Sales and Other Operating Revenues) was 23 percent less than in the immediately preceding quarter and 46 percent less than in the year-earlier period.  Our Revenue estimate was too low by 4.9 percent (not bad).
 
Reported production in the quarter was 2 percent higher than in the first quarter of 2008.  BP claims that certain (incomprehensible) adjustments bring the growth rate to 4 percent

BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 79 percent of Revenue.  This equates to a Gross Margin of 21 percent, which is significantly more profitable than our 18 percent prediction.  The Gross Margin in the year-earlier quarter was 19.3 percent.

Depreciation was 6.0 percent of Revenue.  This percentage matched our forecast, but our Revenue prediction was too low. 

Exploration costs in the first quarter were 40 percent less than our $200 million estimate.

We did better with Sales, General, and Administrative (SG&A) expenses, which BP calls Distribution and Administration Expenses.  These expenses were 7.1 percent of Revenue, and we expected them to be 7.8 percent.

Other Operating income and expenses is our catchall category for items such as gains/losses on derivatives.  Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter.  In the first quarter, the Other category consisted of a $186 million gain that we didn't forecast.

Operating Income, as we define it, was $3.8 billion, almost 60 percent less than last year's $9.8 billion gain.  However, Operating Income was more than double our pessimistic prediction.  Better-than-expected Revenue and Gross Margin explained why the actual results exceeded our prediction.

Non-operating items, such as asset sales and interest, combined to a net loss.  We had expected a net gain.  The income tax rate was 42.3 percent. Our estimate was 40 percent. 

After-tax earnings from jointly controlled entities and associates added $470 million.  We expected $500 million.

The bottom-line result was Net Income of $2.6 billion ($0.81/ADR), which was 64 percent less than earnings in the year-earlier quarter.  Our estimate was 35 percent too pessimistic.


Now for the gauges:

Cash Management	March 2009	3 months prior	12 months prior
Current Ratio	1.0	1.0	1.1
LTD/Equity	21%	19%	16%
Debt/CFO	1.1 years	0.9 years	1.1 years
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	39.8 days	34.0 days	48.5 days
Working Capital/Invested Capital	-2.4%	-2.9%	4.5%
Cash Conversion Cycle Time (CCCT)	12.7 days	12.3 days	18.0 days
Gauge Score (0 to 25)	12	12	9

BP has taken on more Long-Term Debt, and this is seen in LTD/Equity ratio.  However, the increase in Debt in balanced by a proportionate increase in Cash Flow to service the Debt.   The efficiency indicators have improved quite a bit in the last year, although we can't say we're pleased to see a negative Working Capital value.

Growth	March 2009	3 months prior	12 months prior
Revenue growth	3.2%	27.0%	17.8%
Revenue/Assets	135%	156%	132%
CFO growth	18.6%	54.2%	1.5%
Net Income growth	-27.1%	2.9%	9.4%
Gauge Score (0 to 25)	9	18	18

Growth rates are trailing four quarters compared to four previous quarters.

Although Revenue and Net Income have weakened substantially, the rise in Cash Flow from Operations is appealing.

Profitability	March 2009	3 months prior	12 months prior
Operating Expenses/Revenue	92.2%	91.4%	90.0%
ROIC	12.3%	15.8%	15.3%
Free Cash Flow/Invested Capital	8.3%	13.3%	7.3%
Accrual Ratio	3.0%	2.6%	4.4%
Gauge Score (0 to 25)	7	11	8

The greatest concern here is in the increase in Operating Expenses as percentage of Revenue.  ROIC and FCF have softened.
 

Value	March 2009	3 months prior	12 months prior
P/E	7.6	6.9	8.2
P/E vs. S&P 500 P/E	43%	38%	48%
PEG	0.21	0.16	0.18
Price/Revenue	0.4	0.4	0.6
Enterprise Value/Cash Flow (EV/CFO)	4.7	4.5	7.8
Gauge Score (0 to 25)	20	22	15

BP's valuation ratios are attractive and can be compared with other companies in the Major Integrated Oil & Gas industry.

Overall	March 2009	3 months prior	12 months prior
Gauge Score (0 to 100)	53	65	48

With the fall in energy prices, BP's growth and profitability metrics have declined.  A couple points were also trimmed from the Value gauge, but it remains at a very strong 20 points.

Although Revenue, Operating Income, and Net Income all dropped significantly, they all did better than we had thought likely.  The Gross Margin was the highest it has been since early 2006.   This indicates that BP is (at long last) getting some control over the costs to produce Revenue.

BP: Earnings Announcement 2009-1Q

BP p.l.c. (NYSE: BP) had a profit of $0.81/ADR, down from $2.37, but much better than our $0.53 estimate, during the three months that ended 31 March 2009. 

The spreadsheet below compares the actual results to our Income Statement model of BP.  Please note that our arrangement of data may differ in material respects from the company's presentation.

We will post a thorough evaluation soon.


http://sheet.zoho.com/public/ncarvin/bp-income-statement-2009q1?mode=html

COP: Financial Analysis through March 2009

ConocoPhillips earned $0.56 per share in the first quarter of 2009.  This post provides the GCFR financial analysis of the results.

The earnings announcement included Income and Cash Flow statements, and a plethora of data for each business segment.  But, it did not include a Balance Sheet.  To compute preliminary gauge scores, we assumed that the company's various Assets and Liabilities didn't change in value since December.

We will adjust the results after ConocoPhillips files a complete 10-Q report with the SEC.


First, we present some background information.

Conoco, Inc., and Phillips Petroleum merged in August 2002.  Burlington Resources, with its extensive natural gas operations, was added in March 2006. 

ConocoPhillips (NYSE: COP) is the fifth-largest Major Integrated Oil & Gas company when assessed by Revenue, and it ranks seventh by Market Capitalization.  It is fourth on the 2009 edition of the Fortune 500 list of the largest U.S. corporations, up from fifth in 2008.

The roster of major oil and gas firms includes Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), and BP p.l.c. (NYSE: BP).

The weak economy worldwide has reduced demand for oil and gas, which caused prices for energy products to fall dramatically.  Conoco's Revenue in the fourth quarter of 2008 was 15.5 percent less than in the fourth quarter of 2007.  Lower prices also meant that Conoco's assets were worth less.  The company decided to reduce the carrying value of its intangible assets and investments by $35 billion, which was about 19 percent of the company's Total Assets.  Asset impairment charges led to a loss of $31.8 billion (minus $21.37 per share) in the fourth quarter of 2008. 

ConocoPhillips owns 20 percent of LUKOIL (OTC: LUKOY), which is responsible for more than 18 percent of Russia's oil production.  LUKOIL's shrinking market value was responsible for $7.4 billion of the fourth quarter's impairment charges.  Note that the LUKOIL charge was significantly greater than the widely publicized charge ConocoPhillips recorded in 2007, when troubles with the Venezuelan government resulted in a $4.5 billion charge for expropriated assets.

Berkshire Hathaway, Inc. (NYSE: BRK.A), run by super-investor Warren Buffett, and its affiliates owned about 79 million shares of ConocoPhillips on 31 December 2008, up from 17.5 million shares on 31 March 2008.  Buffett characterized the purchase of these shares, when energy prices were soaring, as his biggest mistake in 2008.

In October 2008, Conoco and Australia's Origin Energy, Ltd., (ASX:ORG) formed a 50/50 joint venture named Australia Pacific LNG.  The new company "will focus on coalbed methane production from the Bowen and Surat basins in Queensland, Australia, and LNG processing and export sales."


Looking back to the fourth quarter of 2008, the Revenue decline and the impairment charges combined to cut the GCFR Overall Gauge score from 54 to 46 of the 100 possible points.  The contrarian Value gauge was the only one that increased, and its rise was by a single point.  The Value score got a lift from the 41 percent drop in the price of ConocoPhillips shares, from $88.30 to $51.80, during 2008.

The decline continued in the first quarter of 2009:  the closing share price on 31 March was only $39.16.


Now, with the actual and estimated data for the first quarter, our gauges display the following scores:

• Cash Management: 11 of 25 (down from 12 in December)
  
• Growth: 10 of 25 (down from 13)
  
• Profitability: 9 of 25 (down from 11)
  
• Value: 13 of 25 (up from 12)
  

• Overall: 44 of 100 (down from 46)
  

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations. 

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.


http://sheet.zoho.com/public/ncarvin/cop-income-statement-2009q1?mode=html





Revenue was 31 percent less than in the December 2008 quarter, and it was 44 percent less than in the year-earlier quarter.  Our prediction proved too optimistic by 9.2 percent.  After considering energy prices and refining margins, we estimated that quarterly Revenue would fall 24.6 percent from December 2008 to March 2009.

The Cost of Goods Sold [i.e., purchased crude oil, natural gas and products + Production and operating expenses] in the first quarter was 72.6 percent of Revenue, which equates to a Gross Margin of 27.4 percent.  Our forecast of a 25-percent margin proved too pessimistic. 

In the March 2008 quarter, the Gross Margin was 26.2 percent.

Depreciation expenses were 7.3 percent of Revenue.  We had predicted 6.5 percent.

Exploration costs were almost $175 million less than the value we had assumed based on the company's guidance.  The reason for the discrepancy isn't yet clear.

Sales, General, and Administrative (SG&A) expenses, which in our categorization is dominated by non-income taxes, were 12.8 percent of Revenue, which slightly exceeded to our 12 percent estimate. 

Non-recurring operating expenses were more than twice our estimate.

Operating Income was 70 percent less than in the March 2008 quarter.  While Revenue was lower than we predicted, and some costs were higher, the much better-than-expected Gross Margin was enough to push Operating Income 7.3 percent above our estimate.

Non-operating income and expenses, such as equity in the earnings of affiliates and interest, did not meet our expectations.  And, the effective income tax rate was a stunning 58 percent, compared to our 44 percent prediction.

As a result, Net Income was 80 percent less than the year-earlier value, and it was 36 percent less than our estimate.

Now, for the gauges:

Cash Management	March 2009 (1)	3 months prior	12 months prior
Current Ratio	1.0	1.0	0.9
LTD/Equity	49%	49%	24%
Debt/CFO	1.5 years	1.2 years	0.9 years
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	24.5 days	21.5 days	28.2 days
Working Capital/Invested Capital	-1.1%	-1.1%	-2.3%
Cash Conversion Cycle Time	-1.3 days	-1.1 days	-2.5 days
Gauge Score (0 to 25)	11	12	10

_{1.  Data extracted from the Balance Sheet dated 31 December 2008.}

The Cash Management metrics are likely to change when an up-to-date Balance Sheet is published. 

December's doubling of Long-term Debt to Equity is due to the increase in debt from $22 billion to $27 billion and the 40 percent reduction in Shareholders' Equity resulting from last year's huge impairment charges.  There is also less Cash Flow from Operations to cover the Debt.

We're not thrilled that Working Capital is negative, albeit slightly.

Growth	March 2009	3 months prior	12 months prior
Revenue growth	7.8%	28.6%	12.9%
Revenue/Assets	133%	150%	113%
CFO growth	-26.0%	-7.7%	2.9%
Net Income growth	N/A	N/A	-20.9%
Gauge Score (0 to 25)	10	13	14

Growth rates are trailing four quarters compared to four previous quarters.

The steep rise in energy prices, later reversed, powered sharp Revenue growth in the first half of 2008.  Although positive on a trailing year basis, Revenue fell sharply in the last two quarters.

Cash Flow has fallen precipitously, and Net Income growth is N/A because the company recorded a huge loss in 2008.

Revenue/Assets rose because the impairment charges cut deeply into Assets.

Profitability	March 2009	3 months prior	12 months prior
Operating Expenses/Revenue	89.4%	88.7%	88.1%
ROIC	16.9%	19.9%	11.1%
Free Cash Flow/Invested Capital	-0.9%	4.3%	10.9%
Accrual Ratio	-14.5%	-15.4%	-1.0%
Gauge Score (0 to 25)	9	11	8

The rise in the Operating Expense ratio was abetted by declining Revenue.  We expect the rise to reverse if the Gross Margin improvement seen in the first quarter is maintained in 2009.

ROIC's fall was cushioned by the impairment charges that reduced Invested Capital.

It's ironic that non-cash charges make the company's earnings appear to be of higher quality, as indicated by the much lower Accrual Ratio.

Value	March 2009	3 months prior	12 months prior
P/E	N/A	N/A	9.7
P/E vs. S&P 500 P/E	N/A	N/A	56%
PEG	N/A	N/A	0.35
Price/Revenue	0.3	0.3	0.6
Enterprise Value/Cash Flow (EV/CFO)	4.7	4.6	5.8
Gauge Score (0 to 25)	13	12	3

Since GAAP earnings were hugely negative in the fourth quarter of 2008, we don't learn anything from the Price/Earnings ratio.  However, it is interesting to see how low the Price/Sales and Price/Cash Flow ratio have dropped, even in the face of lower Revenue and falling Cash Flow.

If we back out $35 billion in fourth-quarter 2008 charges, the P/E multiple, on a trailing-twelve-months basis, would be about 8.4.

The price of ConocoPhillips shares fell 41 percent, from $88.30 to $51.80, during 2008.  The closing share price on 31 March was only $39.16.

Conoco's valuation ratios can be compared with other companies in the Major Integrated Oil and Gas industry.

Overall	March 2009	3 months prior	12 months prior
Gauge Score (0 to 100)	44	46	28

At the end of 2008, the historic decline in energy prices led ConocoPhillips to mark down the value of its intangible assets and investments by approximately $35 billion (about 19 percent of total assets.)  Although the company moved up a notch in the Fortune 500 list, Shareholders have much less Equity.

Discontinuities of this magnitude make year-to-year and quarter-to-quarter comparisons difficult.

In the first quarter of 2009, Revenue, Operating Income, and Net Income were all much lower than in 2008.  However, the company did make money in a very challenging time, and some Operating Expenses fell more than we anticipated.

We really need to see the 10-Q to get updated Balance Sheet data and to read the explanations for some surprising Income Statement data (e.g., a tax rate near 60 percent)

MSFT: Financial Analysis through March 2009

Microsoft Corp. (NASDAQ: MSFT) earned $0.33 per share in the three months that ended on 31 March 2009.  The company has already filed a 10-Q report for this period, which was the third quarter of the company's fiscal year.  This post provides the GCFR analysis of the results.

For the first time, Revenue was less than in the comparable quarter of the preceding year.



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.

Revenue from Microsoft Windows has recently been adversely affected by a substantial deceleration of personal computer sales growth and by the greater proportion of low-cost netbook PCs.  Microsoft responded to the new environment by taking several steps to cut costs, including the eventual elimination of up to 5000 jobs.  In the March 2009 quarter, the company recorded a charge of $290 million to cover employee severance costs.

Microsoft will soon make available a release candidate version of Windows 7, which will replace, perhaps later this year, the disappointing Windows Vista operating system.

The company's dominance in software has brought it considerable attention from antitrust authorities in the U.S. and around the world.  Judge Colleen Kollar-Kotelly, who sits on the U.S. District Court for the District of Columbia, recently extended federal oversight of Microsoft's 2002 antitrust settlement by another 18 months.  In Europe, Microsoft has been charged with unfairly bundling its Internet Explorer web browser with Windows.

Microsoft has been trying to increase its role in online advertising.  However, according to comScore, Google Inc. (NASDAQ: GOOG) performed 63.7 percent of U.S. online searches in March, to Microsoft's 8.3 percent.  Dow Jones reported that Microsoft is "still far from making good on its promise to challenge Google."  To improve its prospects in this area, Microsoft might try for a second time to acquire Yahoo! Inc. (NASDAQ: YHOO).  A $40+ billion bid in early 2008 was withdrawn when Yahoo's management resisted.  There have since been occasional reports that Microsoft remains interested in acquiring Yahoo's search business or partnering with it.  For example, Microsoft CEO Steve Ballmer made comments last March confirming his interest in Yahoo.

In September 2008, Microsoft joined the elite ranks of non-financial entities with AAA bond ratings, which is the highest S&P grade.  Microsoft also authorized its second $40 billion share repurchase program in September 2008.


Looking back to the December 2008 quarter, we are reminded that Microsoft's Net Income dropped 11.3 percent and Revenue disappointed.  This period also included a $400 million loss on derivatives and a $350 million loss on "foreign currency remeasurements."

December's results led to a significant drop in the Growth gauge.  However, a 45 percent plunge in Microsoft's share price in 2008 provided lift for our contrarian Value gauge.  The GCFR Overall gauge of Microsoft increased to 71 of the 100 possible points, which is an excellent score.


Now, with the available data from the March 2009 quarter, our gauges display the following scores:

• Cash Management: 16 of 25 (up from 15 after the December quarter)
  
• Growth: 3 of 25 (down from 10)
  
• Profitability: 13 of 25 (up from 12)
• Value: 25 of 25 (unchanged)
  

• Overall: 69 of 100 (down from 71)
  

Before we examine each gauge, we will compare the actual results to our Income Statement model, which was based on company guidance and our trend analysis.

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.


http://sheet.zoho.com/public/ncarvin/template-income-statement-2009q1-1?mode=html





Revenue was 5.6 percent less than in the year-earlier March 2008 quarter, and it was 18 percent less than the sequential December 2008 quarter.  Our estimate proved too optimistic by 1.5 percent.

Trailing four-quarters Revenue growth, at 5.6 percent, is the weakest Microsoft has ever experienced.

Microsoft blames "continued weakness in the global PC market" and the "recessionary economic environment" for the Revenue decline. The Windows operating system, Office application, and online advertising all brought in less Revenue.

The Cost of Goods Sold in the quarter was 20.6 percent of Revenue, which translates into a Gross Margin of 79.4 percent.  The company did a much better job controlling CGS than we had anticipated in the weaker sales environment, which explains why our 76 percent prediction for the Gross Margin was several points too low.

Research and Development and Sales, General, and Administrative expenses were also much lower than we had anticipated based on the company's guidance for the year.   R&D costs were up 8.7 percent, but we expected growth of 18 percent.  SG&A costs were down 30 percent, nearly twice as much as we expected.  Expenses were lower because of "decreased corporate marketing and advertising campaigns and decreased professional consulting fees."

There was a special charge of $290 million for employee severance costs.

Operating Income was 3.4 percent greater than in the March 2008 quarter, which isn't bad considering that Revenue fell and there was a large special charge.  Much lower-than-expected operating expenses pushed Operating Income 31.5 percent above our estimate. 

On the other hand, Microsoft's bottom-line results didn't beat our estimate by the same wide margin because of non-operating items.

Non-operating investment income and interest summed to a disappointing net expense of $388 million.  One reason this item was an expense instead of income was that Microsoft recorded a $452 million charge for loss on equity investments.

The Income Tax Rate of 26.5 percent was a little above the predicted 26 percent.  Net Income in the quarter was 32 percent below last year's value, but it beat our prediction by 9.5 percent.


Now, for the gauges:

Cash Management	March 2009	3 months prior	12 months prior
Current Ratio	1.7	1.6	1.5
LTD/Equity	0%	0%	0%
Debt/CFO	0.1 years	0.1 years	0.0 years
Inventory/CGS	21 days	26 days	39 days
Finished Goods/Inventory	65%	67%	34%
Days of Sales Outstanding (DSO)	56.8 days	66.5 days	57.7 days
Working Capital/Invested Capital	124%	89%	129%
Cash Conversion Cycle Time	-20 days	-13 days	-11 days
Gauge Score (0 to 25)	16	15	15

Microsoft has excellent liquidity and minuscule Debt.  The only Cash Management metric we would like to see improve, and this falls into the nitpicking category, is Days of Sales Outstanding.

Growth	March 2009	3 months prior	12 months prior
Revenue growth	5.6%	7.1%	16.9%
Revenue/Assets	87.6%	93.1%	86.1%
CFO growth	-12.1%	-8.2%	31.5%
Net Income growth	-3.6%	1.6%	18.5%
Gauge Score (0 to 25)	3	10	22

Growth rates are trailing four quarters compared to four previous quarters.

Revenue growth has slowed significantly.  Cash Flow and Net Income are falling.

The Growth score is not zero only because Revenue/Assets improved from March 2008.

Profitability	March 2009	3 months prior	12 months prior
Operating Expenses/Revenue	63.5%	64.6%	64.5%
ROIC	120%	107%	136%
Free Cash Flow/Invested Capital	116%	106%	171%
Accrual Ratio	+7.2%	+0.1%	-3.5%
Gauge Score (0 to 25)	13	12	13

Operating expenses came down substantially in the March quarter.  While ROIC and FCF/Capital are down substantially from last year, the current figures are still impressive and even some improvement relative to the December lows.  However, the increase in Accrual Ratio raises a concern about Earnings Quality.

Value	March 2009	3 months prior	12 months prior
P/E	10.3	10.1	16.3
P/E vs. S&P 500 P/E	59%	55%	95%
PEG	0.33	0.33	0.19
Price/Revenue	2.7	2.8	4.6
Enterprise Value/Cash Flow (EV/CFO)	7.3	7.6	11.0
Gauge Score (0 to 25)	25	25	16

Microsoft's stock price dropped from $35.60 to $19.44 during 2008, and the shares lost another $1 in the March quarter. 

Given this price, the valuation ratios, which can be compared with other companies in the Application Software industry, have kept the Value gauge at its maximum value.

Our calculations indicate that the current P/E and Price/Sales ratios are about one-half of their five-year median values.

Overall	March 2009	3 months prior	12 months prior
Gauge Score (0 to 100)	69	71	62

While the initial response to Microsoft's results in the March 2009 quarter to note the unprecedented decline in Revenue, the cost-control measures announced at the beginning of the year have already gained traction.  The company remains extremely profitable, and its shares appear to be selling at a discounted price.

It's true that Growth has come to a halt, and the company faces challenges from drops in IT spending, more and more netbooks, competition from open source software, and even cloud computing.

We will conclude with one more ratio.  At the end of March, Microsoft's Market Value was about $164 billion.  During the first three quarters of fiscal 2009, Cash Flow from Operations was $15.2 billion.  We could say that this equates to a Price/Cash Flow ratio of about 164/[(4/3)*15.2] = 8.1.  The inverse of this number indicates that each dollar to purchase a share of Microsoft returns 12.4 cents in annual cash flow.  Yes, Cash Flow has fallen, and may continue to do so, but there is a wide margin between this return and the risk-free rates.