12 September 2008

MSFT: Look Ahead to September 2008 Quarterly Results

Our previously posted analysis of Microsoft's June 2008 quarter, which was the fourth of the company's fiscal year, found that the GCFR Overall Gauge score edged up to a very good 59 out of 100 points. 

The Growth and Value gauges were particularly strong.  The Value gauge, at 18 of 25 possible points, rose as Microsoft's share price fell due to the ultimately unsuccessful $40+ billion proposal to acquirer  Yahoo! Inc. (YHOO).
Microsoft Corp. (MSFT), the gigantic developer of operating system and application software, also sells video game consoles, music players, and computer peripherals.  Microsoft is determined to be a major player in the online advertising business, in direct competition with Google Inc. (GOOG).

Revenue in the June quarter exceeded that in the year-earlier quarter by 18.4 percent, which surpassed the upper end of the company's guidance.  Research and Developmentexpenses were, however, unusually high, which Microsoft attributed to increased personnel ("head-count") expenses and rising product development costs.  The higher costs, somewhat offset by a lower Income Tax Rate, resulted in Net Income below our prediction by 3.7 percent; however, it was 42 percent above earnings in the June 2007 quarter.

On 23 October, Microsoft will report results for the three months ending 30 September 2008, which is the first quarter of fiscal 2009.  In anticipation of this report, we've modeled Microsoft's Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

Management guidance for the September quarter was included in the press release reporting the results of Microsoft's June quarter.  At the time this guidance was issued, it was lower than the consensus analyst estimate.

The company forecast that Revenue in the September quarter would be between $14.7 and $14.9 billion.  The mid-point, $14.8 billion, which is the figure we will use, is 7.5 percent higher than Revenue in the September 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 13.7 percent if sales in the September quarter match the guidance. 

Microsoft's Gross Margin is typically around 80 percent (!).  Our expectation for the September 2008 quarter is a Gross Margin of 82 percent.  This ratio translates into a Cost of Goods Sold of (1 - 0.82) * $14.8 billion, or $2.7 billion. 

R&D expenses have been volatile recently.  We will assume 14.0 percent of Revenue, or $2.1 billion, for R&D expenses in the September quarter. 

SG&A expenses fluctuate even more wildly, but the September quarter tends to have relatively lower expenses.  We will assume SG&A expenses in the September quarter of 28 percent of Revenue, or 0.28 * $14.8 billion = $4.1 billion.

These estimates yield an estimated Operating Income of $5.9 billion, in line with the $5.9 to $6.0 billion range indicated in Microsoft's guidance.  This figure reflects no growth relative to September 2007.

Investment and interest income has recently been between $300 and $400 million per quarter.  We'll assume net Non-operating income of $350 million.  This would lead to Pre-Tax Income of $6.3 billion.

We'll also assume an income tax rate of 30 percent, which leads to a Net Income value just under $4.4 billion ($0.47/share).  This matches the company's guidance.  Net income was $4.3 billion ($0.45/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.


September 2008
September 2007
Op expenses

CGS (2,664)

R&D (2,072)

SG&A (4,144)

Other 0
Operating Income
Other income


Interest, etc.
Pretax income

Income tax

Net Income

Shares outstanding


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