Ouch. Microsoft Profits Drop 32 Percent In March Quarter

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.}