Microsoft Reports Record Second-Quarter Results

Windows 7 demand drives record revenue and profit.

Jan 28, 2010, 16:05 ET from Microsoft Corp.

REDMOND, Wash., Jan. 28 /PRNewswire-FirstCall/ -- Microsoft Corp. today announced record revenue of $19.02 billion for the second quarter ended Dec. 31, 2009, a 14% increase from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $8.51 billion, $6.66 billion and $0.74 per share, which represented increases of 43%, 60% and 57%, respectively, when compared with the prior year period.

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These financial results include the recognition of $1.71 billion of deferred revenue, an impact of $0.14 of diluted earnings per share, relating to the Windows 7 Upgrade Option Program and pre-sales of Windows 7 to OEMs and retailers before general availability. Adjusting for the deferred revenue recognition, second-quarter revenue totaled $17.31 billion, and diluted earnings per share totaled $0.60 per share.

"Exceptional demand for Windows 7 led to the positive top-line growth for the company," said Peter Klein, chief financial officer at Microsoft. "Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth."  

Windows 7 and Windows Server 2008 R2 launched globally on October 22 as anticipated.  Through the second quarter, Microsoft has sold over 60 million Windows 7 licenses making it the fastest selling operating system in history.

"This is a record quarter for Windows units," said Kevin Turner, chief operating officer at Microsoft. "We are thrilled by the consumer reception to Windows 7 and by business enthusiasm to adopt Windows 7."

Business Outlook

Management will discuss second-quarter results and the company's business outlook on a conference call and webcast at 2:30 p.m. PST (5:30 p.m. EST) today.

In addition, Microsoft offers operating expense guidance of $26.2 billion to $26.5 billion, for the full year ending June 30, 2010.

Webcast Details

Peter Klein, chief financial officer, Frank Brod, chief accounting officer, and Bill Koefoed, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. PST (5:30 p.m. EST) today to discuss details of the company's performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/msft. The webcast will be available for replay through the close of business on Jan. 28, 2011.

    
    
    Adjusted Financial Results – Reconciliation of Non-GAAP Measures
    
                                       3 Months Ended 
                                     December 31, 2009 Year-over-Year Growth
                                     ----------------- ---------------------
    ($in billions, 
    except per share amounts)                 Diluted             Diluted 
                                              Earnings            Earnings
                                     Revenue Per Share   Revenue Per Share
                                     ------- ---------   ------- ---------
    
    As Reported (GAAP)                $19.02     $0.74       14%       57%
                                      ------     -----       ---       ---
        Deferred Revenue 
         Recognition for Windows 
         7 Upgrade Option Program 
         and Pre-sales                 $1.71     $0.14          
                                       -----     -----
    As Adjusted (Non-GAAP)            $17.31     $0.60        4%       28%
                                      ------     -----       ---       ---
    
    

This information has been provided to aid readers of the financial statements in further understanding the company's financial performance. The impact of certain items and events on the financial results may not be indicative of trends affecting the company's business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

About Microsoft

Founded in 1975, Microsoft (Nasdaq: MSFT) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential.

Forward-Looking Statements

Statements in this release that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as:

  • challenges to Microsoft's business model;
  • intense competition in all of Microsoft's markets;
  • Microsoft's continued ability to protect its intellectual property rights;
  • claims that Microsoft has infringed the intellectual property rights of others;
  • the possibility of unauthorized disclosure of significant portions of Microsoft's source code;
  • actual or perceived security vulnerabilities in Microsoft products that could reduce revenue or lead to liability;
  • government litigation and regulation affecting how Microsoft designs and markets its products;
  • Microsoft's ability to attract and retain talented employees;
  • delays in product development and related product release schedules;
  • significant business investments that may not gain customer acceptance and produce offsetting increases in revenue;
  • unfavorable changes in general economic conditions, disruption of our partner networks or sales channels, or the availability of credit that affect demand for Microsoft's products and services or the value of our investment portfolio;
  • adverse results in legal disputes;
  • unanticipated tax liabilities;
  • quality or supply problems in Microsoft's consumer hardware or other vertically integrated hardware and software products;
  • impairment of goodwill or amortizable intangible assets causing a charge to earnings;
  • exposure to increased economic and regulatory uncertainties from operating a global business;
  • geopolitical conditions, natural disaster, cyberattack or other catastrophic events disrupting Microsoft's business;
  • acquisitions and joint ventures that adversely affect the business;
  • improper disclosure of personal data could result in liability and harm to Microsoft's reputation; and
  • outages and disruptions of services provided to customers directly or through third parties if Microsoft fails to maintain an adequate operations infrastructure.

For further information regarding risks and uncertainties associated with Microsoft's business, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections of Microsoft's SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft's Investor Relations department at (800) 285-7772 or at Microsoft's Investor Relations Web site at http://www.microsoft.com/msft.

All information in this release is as of Jan. 28, 2010. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations.

    
    
    Microsoft Corporation                                                
    Income Statements                                                        
    (In millions, except per share amounts) (Unaudited)                      
                                                                             
                                           Three Months        Six Months   
                                        Ended December 31,  Ended December 31,
                                        ------------------  ------------------
                                            2009    2008       2009    2008 
                                            ----    ----       ----    ---- 
    Revenue                               $19,022 $16,629    $31,942 $31,690 
    Operating expenses:                                                      
      Cost of revenue                       3,628   3,907      6,470   6,755 
      Research and development              2,079   2,290      4,144   4,573 
      Sales and marketing                   3,619   3,662      6,409   6,706 
      General and administrative            1,124     831      1,865   1,718 
      Employee severance                       59       -         59       - 
                                              ---     ---        ---     --- 
        Total operating expenses           10,509  10,690     18,947  19,752 
                                           ------  ------     ------  ------ 
    Operating income                        8,513   5,939     12,995  11,938 
    Other income (expense)                    370    (301)       653    (309)
                                              ---    ----        ---    ---- 
    Income before income taxes              8,883   5,638     13,648  11,629 
    Provision for income taxes              2,221   1,464      3,412   3,082 
                                            -----   -----      -----   ----- 
    Net income                             $6,662  $4,174    $10,236  $8,547 
                                           ======  ======    =======  ====== 
                                                                             
    Earnings per share:                                                      
      Basic                                 $0.75   $0.47      $1.15   $0.95 
                                            =====   =====      =====   ===== 
      Diluted                               $0.74   $0.47      $1.14   $0.94 
                                            =====   =====      =====   ===== 
                                                                             
    Weighted average shares outstanding:                                     
      Basic                                 8,856   8,903      8,885   8,994 
                                            =====   =====      =====   ===== 
      Diluted                               8,951   8,914      8,975   9,052 
                                            =====   =====      =====   ===== 
                                                                             
    Cash dividends declared per common                                       
     share                                  $0.13   $0.13      $0.26   $0.26 
                                            =====   =====      =====   ===== 
    
    
    
    Microsoft Corporation                                                 
    Balance Sheets                                                        
    (In millions)                                                         
                                                                          
                                                      December 31,   June 30, 
                                                          2009       2009 (1) 
                                                      ------------  -------- 
                                                       (Unaudited)          
    Assets                                                                
    Current assets:                                                       
      Cash and cash equivalents                           $9,422      $6,076 
      Short-term investments (including securities                        
       loaned of $2,654 and $1,540)                       26,677      25,371 
                                                          ------      ------ 
        Total cash, cash equivalents, and short-term                       
         investments                                      36,099      31,447 
      Accounts receivable, net of allowance for                           
       doubtful accounts of $506 and $451                 11,196      11,192 
      Inventories                                            589         717 
      Deferred income taxes                                2,056       2,213 
      Other                                                2,547       3,711 
                                                           -----       ----- 
        Total current assets                              52,487      49,280 
    Property and equipment, net of accumulated                            
     depreciation of $8,170 and $7,547                     7,402       7,535 
    Equity and other investments                           6,976       4,933 
    Goodwill                                              12,368      12,503 
    Intangible assets, net                                 1,346       1,759 
    Deferred income taxes                                      -         279 
    Other long-term assets                                 1,517       1,599 
                                                           -----       ----- 
          Total assets                                   $82,096     $77,888 
                                                         =======     ======= 
                                                                          
    Liabilities and stockholders' equity                                  
    Current liabilities:                                                  
      Accounts payable                                    $3,171      $3,324 
      Short-term debt                                      2,249       2,000 
      Accrued compensation                                 2,417       3,156 
      Income taxes                                           721         725 
      Short-term unearned revenue                         11,361      13,003 
      Securities lending payable                           2,911       1,684 
      Other                                                2,885       3,142 
                                                           -----       ----- 
        Total current liabilities                         25,715      27,034 
    Long-term debt                                         3,746       3,746 
    Long-term unearned revenue                             1,167       1,281 
    Deferred income taxes                                    377           - 
    Other long-term liabilities                            6,808       6,269 
    Commitments and contingencies                                         
    Stockholders' equity:                                                 
      Common stock and paid-in capital - shares
        authorized 24,000;        
        outstanding 8,811 and 8,908                       62,566      62,382 
      Retained deficit, including accumulated other
        comprehensive income  
        of $1,322 and $969                               (18,283)    (22,824)
                                                         -------     ------- 
        Total stockholders' equity                        44,283      39,558 
                                                          ------      ------ 
          Total liabilities and stockholders' equity     $82,096     $77,888 
                                                         =======     ======= 
                                                                          
    (1) Derived from audited financial statements                         
    
    
    
    Microsoft Corporation                                                    
    Cash Flows Statements                                                    
    (In millions) (Unaudited)                                                
                                                                             
                                         Three Months Ended  Six Months Ended
                                             December 31,      December 31,  
                                            --------------   --------------- 
                                             2009    2008     2009     2008 
                                             ----    ----     ----     ---- 
                                                                             
    Operations                                                               
      Net income                            $6,662  $4,174  $10,236   $8,547 
      Adjustments to reconcile net 
       income to net                             
       cash from operations:                                                 
           Depreciation, amortization, and                                   
            other noncash items                615     632    1,261    1,217 
           Stock-based compensation            485     417      928      860 
           Net recognized losses (gains) on                                  
            investments and derivatives       (188)    139     (254)     175 
           Excess tax benefits from stock-                                   
            based compensation                 (15)     (2)     (24)     (46)
           Deferred income taxes               550     454      504      830 
           Deferral of unearned revenue      6,926   5,969   13,605   10,155 
           Recognition of unearned revenue  (9,126) (6,364) (15,363) (12,408)
           Changes in operating assets                                       
            and liabilities:                                                 
             Accounts receivable            (2,789) (1,647)     (41)   2,338 
             Other current assets            1,244     797      590      239 
             Other long-term assets             16     (69)     (62)    (185)
             Other current liabilities         285     614     (954)  (3,938)
             Other long-term liabilities       304     668      650    1,368 
                                               ---     ---      ---    ----- 
            Net cash from                                                    
             operations                      4,969   5,782   11,076    9,152 
                                             -----   -----   ------    ----- 
    Financing                                                                
      Short-term borrowings (repayments),                                    
       maturities                                                            
       of 90 days or less, net                (475)     21      (97)   1,996 
      Proceeds from issuance of debt,                                        
       maturities                                                            
       longer than 90 days                   1,046       -    1,741        - 
      Repayments of debt, maturities                                         
       longer than 90 days                    (573)      -   (1,396)       - 
      Common stock issued                      729      96      977      324 
      Common stock repurchased              (3,867) (2,820)  (5,407)  (9,313)
      Common stock cash dividends           (1,152) (1,157)  (2,309)  (2,155)
      Excess tax benefits from stock-                                        
       based compensation                       15       2       24       46 
                                               ---     ---      ---      --- 
            Net cash used in                                                 
             financing                      (4,277) (3,858)  (6,467)  (9,102)
                                            ------  ------   ------   ------ 
    Investing                                                                
      Additions to property and equipment     (376)   (842)    (811)  (1,620)
      Acquisition of companies, net of                                       
       cash acquired                           (63)   (450)    (102)    (827)
      Purchases of investments              (4,287) (6,596) (14,777) (10,842)
      Maturities of investments              1,896     290    5,394      754 
      Sales of investments                   3,361   5,700    7,778   12,775 
      Securities lending payable              (623)   (601)   1,227   (2,144)
                                              ----    ----    -----   ------ 
            Net cash used in                                                 
             investing                         (92) (2,499)  (1,291)  (1,904)
    Effect of exchange rates on cash and                                     
     cash equivalents                           (1)    (83)      28     (139)
                                               ---     ---      ---     ---- 
    Net change in cash and                                                   
     cash equivalents                          599    (658)   3,346   (1,993)
    Cash and cash equivalents,                                               
     beginning of period                     8,823   9,004    6,076   10,339 
                                             -----   -----    -----   ------ 
    Cash and cash equivalents,                                               
     end of period                          $9,422  $8,346   $9,422   $8,346 
                                            ======  ======   ======   ====== 
    
    
    
    Microsoft Corporation                                                     
    Segment Revenue and Operating Income (Loss)                               
    (In millions) (Unaudited)                                                 
                                                                              
                                          Three Months Ended  Six Months Ended
                                             December 31,        December 31, 
                                            -------------     --------------- 
                                             2009     2008     2009     2008 
                                             ----     ----     ----     ---- 
    Revenue                                                                   
    -------                                                                   
    Windows & Windows Live Division         $6,904   $4,064   $9,528   $8,337 
    Server and Tools                         3,844    3,755    7,278    7,172 
    Online Services Division                   581      609    1,067    1,132 
    Microsoft Business Division              4,745    4,881    9,149    9,835 
    Entertainment and Devices Division       2,902    3,256    4,793    5,149 
    Unallocated and other                       46       64      127       65 
                                               ---      ---      ---      --- 
    Consolidated                           $19,022  $16,629  $31,942  $31,690 
                                           =======  =======  =======  ======= 
                                                                              
    Operating Income (Loss)                                                   
    -----------------------                                                   
    Windows & Windows Live Division         $5,394   $2,712   $6,854   $5,761 
    Server and Tools                         1,491    1,375    2,767    2,409 
    Online Services Division                  (466)    (320)    (950)    (635)
    Microsoft Business Division              3,010    3,021    5,867    6,199 
    Entertainment and Devices Division         375      130      686      290 
    Corporate-level activity                (1,291)    (979)  (2,229)  (2,086)
                                            ------     ----   ------   ------ 
    Consolidated                            $8,513   $5,939  $12,995  $11,938 
                                            ======   ======  =======  ======= 
    
    

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