Ouch. Microsoft Profits Drop 32 Percent In March Quarter

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Microsoft just announced earnings for its third fiscal quarter. Revenues were down 6 percent to $13.65 billion, and net income was down a whopping 32 percent to $2.98 billion or $0.33 EPS. Analysts consensus was closer to $14 billion for revenues and $0.39 for non-GAAP EPS, which Microsoft met thanks to its cost-cutting measures. Still, this can’t be feeling good for Microsoft.

The company is exposed to the weaknesses in the economy in general, and soft demand for PCs and servers in particular. Revenues in its Client business (Windows) was down 15.6 percent to $3.40 billion. It’s servers and tools business proved the the healthiest with a 7 percent increase in revenues to $3.47 billion, marking the first time I believe that servers and tools brought in more revenues than the client business.  The online business saw revenues decline 14.5 percent to $721 million, and its loss doubled to $575 million.

The online business suffered from a 16 percent decline in advertising revenues, driven by lower display ad rates. On teh bright side, page views and search queries on Microsoft sites were both up.

1.7 million Xbox360 consoles were sold in the quarter, up 30 percent, but revenues for the Entertainment and Devices business remained flat at $1.57 billion. And it actually dipped into an operating loss of $31 million.

Net cash from operations was $6 billion in the quarter, $1 billion less than a year ago, but Microsoft still ended the quarter with $25.3 billion in cash on its balance sheet.

Here is the breakdown in revenues and operating profits by business:

MICROSOFT CORPORATION

Segment Revenue and Operating Income (Loss)
(In millions) (Unaudited)

Three Months Ended
March 31,
Nine Months Ended
March 31,
2009 2008 2009 2008

Revenue







Client $3,404 $4,033 $11,604 $12,506
Server and Tools 3,467 3,238 10,616 9,381
Online Services Business 721 843 2,357 2,377
Microsoft Business Division 4,505 4,731 14,330 13,663
Entertainment and Devices Division 1,567 1,592 6,564 6,616
Unallocated and other (16) 17 (133) 40







Consolidated $13,648 $14,454 $45,338 $44,583







Operating Income (Loss)







Client $2,514 $3,115 $8,689 $9,855
Server and Tools 1,344 1,080 3,978 3,170
Online Services Business (575) (226) (1,521) (737)
Microsoft Business Division 2,877 3,127 9,325 9,010
Entertainment and Devices Division (31) 106 299 668
Corporate-level activity (1,691) (2,912) (4,394) (5,374)







Consolidated $4,438 $4,290 $16,376 $16,592







And here is the main income statement and balance sheet:

MICROSOFT CORPORATION

INCOME STATEMENTS
(In millions, except per share amounts) (Unaudited)

Three Months Ended
March 31,
Nine Months Ended
March 31,
2009 2008 2009 2008

Revenue $13,648 $14,454 $45,338 $44,583
Operating Expenses:
Cost of revenue

2,814 2,514 9,569 8,732
Research and development

2,212 2,035 6,785 5,757
Sales and marketing

2,981 3,274 9,687 9,377
General and administrative

913 2,341 2,631 4,125
Employee severance

290 - 290 -







Total operating expenses

9,210 10,164 28,962 27,991







Operating income 4,438 4,290 16,376 16,592
Other income (expense) (388) 520 (697) 1,254







Income before income taxes 4,050 4,810 15,679 17,846
Provision for income taxes 1,073 422 4,155 4,462







Net income $2,977 $4,388 $11,524 $13,384







Earnings per share:
Basic

$0.33 $0.47 $1.29 $1.43







Diluted

$0.33 $0.47 $1.28 $1.41







Weighted average shares outstanding:
Basic

8,891 9,307 8,960 9,349







Diluted

8,904 9,428 9,008 9,492







Cash dividends declared per common share $0.13 $0.11 $0.39 $0.33







MICROSOFT CORPORATION

BALANCE SHEETS
(In millions)


March 31, 2009 June 30, 2008 (1)

(Unaudited)
Assets
Current assets:
Cash and cash equivalents

$7,285 $10,339
Short-term investments (including securities pledged as collateral of $1,445 and $2,491)

18,055 13,323







Total cash, cash equivalents, and short-term investments

25,340 23,662
Accounts receivable, net of allowance for doubtful accounts of $242 and $153 9,182 13,589
Inventories 657 985
Deferred income taxes 1,926 2,017
Other 3,619 2,989







Total current assets

40,724 43,242
Property and equipment, net of accumulated depreciation of $7,236 and $6,302 7,112 6,242
Equity and other investments 4,112 6,588
Goodwill 12,554 12,108
Intangible assets, net 1,756 1,973
Deferred income taxes 956 949
Other long-term assets 1,639 1,691







Total assets

$68,853 $72,793







Liabilities and stockholders’ equity
Current liabilities:
Accounts payable

$3,017 $4,034
Short-term debt

1,999 -
Accrued compensation

2,644 2,934
Income taxes

773 3,248
Short-term unearned revenue

10,924 13,397
Securities lending payable

1,533 2,614
Other

2,933 3,659







Total current liabilities

23,823 29,886
Long-term unearned revenue 1,388 1,900
Other long-term liabilities 6,699 4,721
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 8,898 and 9,151 61,896 62,849
Retained deficit, including accumulated other comprehensive income of $726 and $1,140 (24,953) (26,563)







Total stockholders’ equity

36,943 36,286







Total liabilities and stockholders’ equity

$68,853 $72,793







(1)Derived from audited financial statements.

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