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Earnings Release FY13 Q3

Microsoft Reports Third-Quarter Results

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

 

REDMOND, Wash. — Apr. 18, 2013 — 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

IMPORTANT NOTICE TO USERS (summary only, click here  for full text of notice); All information is unaudited unless otherwise noted or accompanied by an audit opinion and is subject to the more comprehensive information contained in our SEC reports and filings. We do not endorse third-party information. All information speaks as of the last fiscal quarter or year for which we have filed a Form 10-K or 10-Q, or for historical information the date or period expressly indicated in or with such information. We undertake no duty to update the information. Forward-looking statements are subject to risks and uncertainties described in our  Forms 10-Q and 10-K.
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IMPORTANT NOTICE TO USERS (summary only, click here  for full text of notice); All information is unaudited unless otherwise noted or accompanied by an audit opinion and is subject to the more comprehensive information contained in our SEC reports and filings. We do not endorse third-party information. All information speaks as of the last fiscal quarter or year for which we have filed a Form 10-K or 10-Q, or for historical information the date or period expressly indicated in or with such information. We undertake no duty to update the information. Forward-looking statements are subject to risks and uncertainties described in our  Forms 10-Q and 10-K.