Microsoft
Microsoft Corporation is engaged in developing, manufacturing, licensing, and supporting a range of software products and services for different types of computing devices.
Microsoft - 7th heaven, almost
Patience is a virtue, even in the fast-moving world of software. Microsoft’s first quarter earnings for the 2010 financial year have justified our view on the stock that it simply required some time for the company to release its latest version of Windows and for businesses to start spending on IT again.
Fat Prophets initially recommended buying Microsoft at $30.72 in January (FAT 49). Our last review of this stock was in July (FAT 175). Since then, Microsoft has posted additional gains, reaching a high of $29.35 this week. Since the March low of $14.87, there has been a strong re-rating of the stock, with prices close to doubling in price.
After the company’s fourth quarter earnings, it seemed apparent that many consumers and businesses were holding back on purchases of Microsoft product, knowing the company was about to release a new version of the popular operating system. This seems to have come to fruition as Microsoft’s first quarter earnings demonstrate.
Net income for the three months ending September 2009 of $3,574 million was 18% below the same quarter last year, partly due to the deferral of the Windows 7 product launch and partly due to weak markets generally. Operating income of $4,482 million was 25% below the prior period.
The Windows division revenue declined by 39% to $2,620 million primarily as a result of the deferral of approximately $1.5 billion of revenue related to the Windows 7 upgrade offered to purchasers of Windows Vista. Most of this impact should therefore be seen in the second quarter earnings making the current quarter numbers somewhat distorted. Microsoft estimates that total worldwide PC shipments from all sources grew about 0-2% providing a positive background for future sales of software and related products.
Microsoft indicated that the market for netbooks remained fairly strong and represented about 12% of total PC shipments, similar to the previous quarter.
The Server and Tools division experienced flat revenue growth at $3,434 million and operating income growth of 23% to $1,283 million. Strong gains for Windows Server, SQL Server and System Center products sustained product growth but was offset by a decline in services revenue. About 55% of Microsoft’s revenue in this division comes from multi-year licensing agreements.
The solid gain in operating income in Servers and Tools arose from a big decrease in expenses. Sales and marketing costs were slashed by 11% as headcount dropped and fewer consultants helped lower the raw cost of sales by 9%. Research and development cut costs by 6%, again through having fewer people on board. Not surprisingly, general and administrative expenses dropped by 18% also through fewer people.
The Microsoft Business division sells the Microsoft Office system and Microsoft Dynamics business solutions. Revenue declined 11% to $4,404 million pulling operating profit down by a similar rate to $2,863 million. Microsoft noted the continuing weak macro-economic conditions that have kept the larger enterprise and business customers on the sidelines as the culprit for the subdued performance. The lower US dollar also clipped about $88 million from revenue. The prior quarter had also seen higher consumer price promotions that were absent in the current quarter. This contributed to the 34% decline in consumer sales in this division. Microsoft also lowered its headcount in this division to contain costs, mainly through fewer sales people.
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