Earnings Release FY13 Q3

Microsoft Reports Third-Quarter Results
Microsoft delivers record third-quarter revenue and earnings per share; CFO transition announced.

Microsoft Corp. today announced quarterly revenue of $20.49 billion for the quarter ended March 31, 2013. Operating income, net income, and diluted earnings per share for the quarter were $7.61 billion, $6.06 billion, and $0.72 per share.

These financial results reflect the net recognition of revenue related to the Windows Upgrade Offer, Office Upgrade Offer and Pre-Sales, and the Entertainment and Devices Division Video Game Deferral, partially offset by the European Commission fine. The following table reconciles these financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. We have provided this non-GAAP financial information to aid investors in better understanding the company’s performance.



Three Months Ended
March 31,
Percentage Change
(In millions, except per share amounts and percentages)
Revenue
Operating income
Diluted EPS
Revenue
Operating income
Diluted EPS
2012 As reported (GAAP)
$17,407
$6,374
$0.60



2013 As reported (GAAP)
$20,489
$7,612
$0.72
18%
19%
20%
Net revenue recognition for Windows Upgrade Offer, Office Upgrade Offer and Pre-Sales, and Video Game Deferral
($1,658)
($1,658)
($0.16)
     


European Commission fine

$733
$0.09
     


2013 As adjusted (non-GAAP)
$18,831
$6,687
$0.65
8%
5%
8%

“The bold bets we made on cloud services are paying off as people increasingly choose Microsoft services including Office 365, Windows Azure, Xbox LIVE, and Skype,” said Steve Ballmer, chief executive officer at Microsoft. “While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long-term.”

The Microsoft Business Division posted $6.32 billion of revenue, an 8% increase from the prior year period. Adjusting for the net recognition of revenue related to the Office Upgrade Offer and Pre-Sales, Microsoft Business Division non-GAAP revenue increased 5%. During the quarter, we launched the new Office, enhancing productivity and the user experience through new mobility, social, and cloud features.

The Server & Tools business reported $5.04 billion of revenue, an 11% increase from the prior year period, driven by double-digit percentage revenue growth in SQL Server and System Center.

“Our enterprise business continues to thrive,” said Kevin Turner, chief operating officer at Microsoft. “Enterprise customers are increasingly turning to Microsoft for their IT solutions and as a result, we continue to take share from our competitors in key areas including hybrid cloud, data platform, and virtualization.”

The Windows Division posted revenue of $5.70 billion, a 23% increase from the prior year period. Adjusting for the recognition of revenue related to the Windows Upgrade Offer, Windows Division non-GAAP revenue was flat. During the quarter, we added to the Surface family of devices with Surface Pro.

The Online Services Division reported revenue of $832 million, an 18% increase from the prior year period. Online advertising revenue grew 22% driven by an increase in revenue per search.

The Entertainment and Devices Division posted revenue of $2.53 billion, an increase of 56% from the prior year period. Adjusting for the recognition of revenue related to the Video Game Deferral, the division’s non-GAAP revenue increased 33% for the third quarter. Xbox LIVE now has over 46 million members worldwide, an 18% increase from the prior year period.

“Our diverse business continues to deliver solid financial results, even as we navigate the evolving device market,” said Peter Klein, chief financial officer at Microsoft. “Looking ahead, we will continue to invest in long-term growth opportunities to drive our devices and services strategy forward and deliver ongoing value to shareholders.”

Business Outlook

Adjusting for the European Commission fine, Microsoft is revising operating expense guidance downward and now offers a range of $30.2 billion to $30.5 billion for the full year ending June 30, 2013. Microsoft also offers preliminary fiscal year 2014 operating expense guidance of $31.6 billion to $32.2 billion, representing 4% to 6% growth from the mid-point of fiscal year 2013 adjusted guidance.

CFO Transition

The company also announced Microsoft CFO Peter Klein will leave the company at the end of the current fiscal year, after nearly four years in role and 11 years at the company. Microsoft will be naming a new CFO from its finance leadership team in the next several weeks.

“It has been a pleasure to work with Peter as CFO,” Ballmer said. “He’s been a key member of my leadership team and a strategic advisor to me, and I wish him the very best.”

“I’ve had a great experience as CFO and overall in my time at Microsoft,” Klein said. “We have an incredibly strong finance organization, and I’m looking forward to working with my successor on the transition through the end of the fiscal year.”

Webcast Details

Peter Klein, chief financial officer, Frank Brod, chief accounting officer, and Chris Suh, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. PDT (5:30 p.m. EDT) 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/investor. The webcast will be available for replay through the close of business on Apr. 18, 2014.

Adjusted Financial Results and Non-GAAP Measures

For the third quarter fiscal year 2013, GAAP revenue, operating income, and earnings per share included the recognition of revenue for the Windows Upgrade Offer, the Office Upgrade Offer and Pre-Sales, and the Entertainment and Devices Division Video Game Deferral, partially offset by the European Commission fine. These items are defined in our Form 10-Q for the quarterly period ended March 31, 2013. In addition to these financial results reported in accordance with generally accepted accounting principles (GAAP), we have provided certain non-GAAP financial information to aid investors in better understanding the company’s performance. Presenting these measures without the impact of these items gives additional insight into operational performance and helps clarify trends affecting the company’s business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Non-GAAP Reconciliations
Windows Division
(In millions, except percentages)
Three Months Ended
March 31,
Percentage Change
2012 As reported revenue (GAAP)
$4,633

2013 As reported revenue (GAAP)
$5,703
23%
Revenue recognized for Windows Upgrade Offer
($1,085)

2013 As adjusted revenue (non-GAAP)
$4,618
0%

Microsoft Business Division
(In millions, except percentages)
Three Months Ended
March 31,
Percentage Change
2012 As reported revenue (GAAP)
$5,842

2013 As reported revenue (GAAP)
$6,319
8%
Net revenue recognized for Office Upgrade Offer and Pre-Sales
($193)

2013 As adjusted revenue (non-GAAP)
$6,126
5%

Entertainment and Devices Division


(In millions, except percentages)
Three Months Ended
March 31,
Percentage Change
2012 As reported revenue (GAAP)
$1,618

2013 As reported revenue (GAAP)
$2,531
56%
Revenue recognized for Video Game Deferral
($380)

2013 As adjusted revenue (non-GAAP)
$2,151
33%
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:

·         intense competition in all of Microsoft’s markets;

·         execution and competitive risks from our increasing focus on devices and services;

·         significant investments in new products and services that may not be profitable;

·         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;

·         cyber-attacks and security vulnerabilities in Microsoft products that could reduce revenue or lead to liability;

·         improper disclosure of personal data that could result in liability and harm to Microsoft’s reputation;

·         outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;

·         government litigation and regulation that may limit 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;

·         unfavorable changes in general economic or market 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, cyber-attack or other catastrophic events disrupting Microsoft’s business; and

·         acquisitions, joint ventures, and strategic alliances that adversely affect the business.

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 website at http://www.microsoft.com/investor.

All information in this release is as of Apr. 18, 2013. 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.

For more information, press only:
Rapid Response Team, Waggener Edstrom Worldwide, (503) 443-7070, rrt@waggeneredstrom.com

For more information, financial analysts and investors only:
Chris Suh, general manager, Investor Relations, (425) 706-4400

Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news/. Web links, telephone numbers, and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today’s 2:30 p.m. PDT conference call with investors and analysts, is available at http://www.microsoft.com/investor.

MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except per share amounts)(Unaudited)
Three Months Ended March 31,
Nine Months Ended March 31,

2013

2012

2013

2012
Revenue
 $   20,489
 $17,407
 $    57,953
 $55,664
Cost of revenue
4,787
3,952
14,647
13,367
   Gross profit
15,702
13,455
43,306
42,297
Operating expenses:
   Research and development
2,640
2,517
7,628
7,217
   Sales and marketing
3,794
3,414
11,048
10,076
   General and administrative
1,656
1,150
3,939
3,433
     Total operating expenses
8,090
7,081
22,615
20,726
Operating income
7,612
6,374
20,691
21,571
Other income (expense)
(9)
(11)
216
337
Income before income taxes
7,603
6,363
20,907
21,908
Provision for income taxes
1,548
1,255
4,009
4,438
Net income
 $     6,055
 $  5,108
 $    16,898
 $17,470
Earnings per share:
   Basic
 $      0.72
 $    0.61
 $        2.02
 $    2.08
   Diluted
 $      0.72
 $    0.60
 $        1.99
 $    2.05
Weighted average shares outstanding:
   Basic
8,364
8,401
8,385
8,398
   Diluted
8,429
8,498
8,472
8,502
Cash dividends declared per
   common share
 $      0.23

 $    0.20

 $        0.69

 $    0.60


MICROSOFT CORPORATION
COMPREHENSIVE INCOME STATEMENTS
(In millions)(Unaudited)
Three Months Ended March 31,
Nine Months Ended March 31,

2013

2012

2013

2012
Net income
 $     6,055
 $  5,108
 $    16,898
 $17,470
Other comprehensive income (loss):
   Net unrealized gains (losses) on
      derivatives (net of tax effects
      of $19, $(24), $(10),
      and $103)
35
(44)
(19)
192
   Net unrealized gains (losses) on
      investments (net of tax
      effects of $150, $255,
      $401, and $(297))
278
474
744
(551)
   Translation adjustments and
      other (net of tax effects
      of $(61), $41, $31,
      and $(93))
(114)
76
58
(172)
      Other comprehensive income
        (loss)
199
506
783
(531)
Comprehensive income
 $     6,254
 $  5,614
 $    17,681
 $16,939


MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)(Unaudited)

March 31,     2013

June 30, 2012
Assets
Current assets:
  Cash and cash equivalents
 $           5,240
 $      6,938
  Short-term investments (including securities
    loaned of $493 and $785)
69,243
56,102
    Total cash, cash equivalents, and short-term
      investments
74,483
63,040
  Accounts receivable, net of allowance for doubtful
    accounts of $267 and $389
11,991
15,780
  Inventories
2,133
1,137
  Deferred income taxes
1,676
2,035
  Other
3,241
3,092
    Total current assets
93,524
85,084
Property and equipment, net of accumulated
  depreciation of $12,247 and $10,962
9,204
8,269
Equity and other investments
11,193
9,776
Goodwill
14,682
13,452
Intangible assets, net
3,240
3,170
Other long-term assets
2,262
1,520
           Total assets
 $       134,105
 $  121,271
Liabilities and stockholders' equity
Current liabilities:
  Accounts payable
 $           4,532
 $      4,175
  Current portion of long-term debt
2,246
1,231
  Accrued compensation
3,474
3,875
  Income taxes
689
789
  Short-term unearned revenue
16,511
18,653
  Securities lending payable
564
814
  Other
3,913
3,151
    Total current liabilities
31,929
32,688
Long-term debt
11,949
10,713
Long-term unearned revenue
1,394
1,406
Deferred income taxes
2,424
1,893
Other long-term liabilities
9,721
8,208
    Total liabilities
57,417
54,908
Commitments and contingencies
Stockholders' equity:
  Common stock and paid-in capital - shares
     authorized 24,000; outstanding 8,349 and 8,381
66,826
65,797
  Retained earnings (deficit)
7,657
(856)
  Accumulated other comprehensive income
2,205
1,422
    Total stockholders' equity
76,688
66,363
           Total liabilities and stockholders' equity
 $       134,105
 $  121,271


MICROSOFT CORPORATION
CASH FLOW STATEMENTS
(In millions)(Unaudited)
Three Months Ended March 31,
Nine Months Ended March 31,

2013

2012

2013

2012
Operations
Net income
 $     6,055
 $  5,108
 $    16,898
 $17,470
Adjustments to reconcile net
    income to net cash from
    operations:
    Depreciation, amortization, and
       other
1,053
766
2,772
2,170
    Stock-based compensation
       expense
599
591
1,805
1,724
    Net recognized losses (gains)
       on investments and
       derivatives
(52)
68
(19)
(74)
    Excess tax benefits from
       stock-based compensation
(6)
(10)
(192)
(84)
    Deferred income taxes
226
(134)
404
282
    Deferral of unearned revenue
9,686
8,142
28,632
21,825
    Recognition of unearned
       revenue
(11,599)
(8,283)
(30,852)
(23,993)
    Changes in operating assets
       and liabilities:
       Accounts receivable
2,191
2,770
3,859
3,851
       Inventories
(483)
(50)
(989)
(79)
       Other current assets
139
73
(96)
938
       Other long-term assets
(13)
9
(326)
(36)
       Accounts payable
(67)
(114)
51
(380)
       Other current liabilities
1,238
492
119
(107)
       Other long-term liabilities
699
166
864
442
          Net cash from
                operations
9,666
9,594
22,930
23,949
Financing
Proceeds from issuance of debt
0
0
2,232
0
Common stock issued
203
1,091
765
1,635
Common stock repurchased
(1,028)
(1,023)
(4,318)
(3,999)
Common stock cash dividends paid
(1,925)
(1,683)
(5,534)
(4,707)
Excess tax benefits from
    stock-based compensation
6
10
192
84
Other
0
0
(16)
0
          Net cash used in financing
(2,744)
(1,605)
(6,679)
(6,987)
Investing
Additions to property and
    equipment
(930)
(749)
(2,463)
(1,683)
Acquisition of companies, net of
    cash acquired, and purchases of
    intangible and other assets
(108)
(84)
(1,564)
(9,586)
Purchases of investments
(18,160)
(23,951)
(48,372)
(45,297)
Maturities of investments
1,265
4,236
4,513
13,122
Sales of investments
9,730
7,946
30,163
23,317
Securities lending payable
543
361
(249)
3
          Net cash used in investing
(7,660)
(12,241)
(17,972)
(20,124)
Effect of exchange rates on cash
    and cash equivalents
(39)
30
23
(60)
Net change in cash and cash
    equivalents
(777)
(4,222)
(1,698)
(3,222)
Cash and cash equivalents,
    beginning of period
6,017
10,610
6,938
9,610
Cash and cash equivalents, end of
    period
 $     5,240
 $  6,388
 $      5,240
 $  6,388


MICROSOFT CORPORATION















SEGMENT REVENUE AND OPERATING INCOME (LOSS)
(In millions)(Unaudited)









Three Months Ended March 31,

Nine Months Ended March 31,



2013

2012

2013

2012
Revenue







Windows Division
 $     5,703

 $  4,633

 $   14,828

 $14,248
Server and Tools
5,039

4,531

14,779

13,484
Online Services Division
832

707

2,397

2,132
Microsoft Business Division
6,319

5,842

17,511

17,787
Entertainment and Devices Division
2,531

1,618

8,250

7,818
Unallocated and other
65

76

188

195
  Consolidated
 $   20,489

 $17,407

 $   57,953

 $55,664








Operating income (loss)







Windows Division
 $     3,459

 $  2,979

 $     8,405

 $  9,133
Server and Tools
1,979

1,686

5,839

5,195
Online Services Division
(262)

(480)

(909)

(1,453)
Microsoft Business Division
4,104

3,797

11,321

11,704
Entertainment and Devices Division
342

(228)

958

632
Corporate-level activity
(2,010)

(1,380)

(4,923)

(3,640)
  Consolidated
 $     7,612

 $  6,374

 $   20,691

 $21,571