tbr 2q11 microsoft initial response

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

Microsoft Corp.

SOFTWARE BUSINESS QUARTERLYSM

2Q11 INITIAL RESPONSE

Publish Date: July 22, 2011

Authors: Allan Krans ([email protected]), Software Practice Senior Analyst and Matthew Casey, Research Analyst Content Editor: Stuart Williams, Software Practice Manager

Second Calendar Quarter 2011

Fourth Fiscal Quarter 2011 Ended June 30, 2011

mailto:[email protected]

TBR

Microsoft 2Q11 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc. 2

No lines of business will be sacred as Microsoft evolves in the face of shifting IT purchasing patterns

TBR Position

TBR Assessment Strategic Objectives

Microsoft’s core business continues to evolve as rapid customer adoption of cloud-based solutions and smart devices shifts the IT industry. Long-held tenents of Microsoft’s business, including Intel-based processors and on-premises IT deployments, are being revisited to maintain the company’s relevance in the face of ongoing change in IT purchasing patterns. Though Microsoft was not at the forefront of cloud computing or the influx of ARM-based mobile computing devices, the company has the resources and newfound willingness to invest in these areas and close the gap with competitors.

Continue to drive adoption of cloud services through new partnerships and offerings

Leveraging its well-established portfolio, Microsoft’s ability to attract big name hardware and service provider partners adds value to its private cloud initiatives. The addition of recognized network and hardware vendors NetApp and Cisco to its Hyper-V Cloud Fast Track program solidifies Microsoft’s ability to deliver private cloud solutions.

Maintain core business model while shifting product delivery to match current market trends

Office 365 leverages Microsoft’s established core Business Division offerings and positions the company to catch up to Google Docs in the cloud business productivity market.

Jump-start Windows growth

Microsoft’s Windows division faces unprecedented challenges as a result of reduced PC shipments, as customers in both the consumer and enterprise markets increasingly look to new smart devices for their IT needs. To regain the dominance of its Windows platform, Microsoft is looking to new deployment of its OS on tablets and smart phones in future quarters.

MSFT 2Q11 PERFORMANCE VS. EXPECTATIONS

(in $ Millions) Consensus Guidance Range Actual

Revenue 17,380$ N/A 17,367$

Operating Income N/A N/A 3,087$

Non- GAAP EPS 0.60$ N/A 0.69$

MSFT 3Q11 GUIDANCE AND EXPECTATIONS

(in $ Millions) TBR Estimate Consensus Guidance Range

Revenue 17,300$ 17,420$ N/A

Operating Income 6,631$ N/A N/A

Non-GAAP EPS N/A 0.67$ N/A

TBR


Microsoft’s 2Q11 earnings mirror the true state of its business

Key Developments

Microsoft’s 2Q11 earnings mirror the state of its business

• Microsoft is facing tremendous threats to its Windows business, large opportunities in Systems and Tools, and the strong possibility of continued dominance in productivity software – all of which came through clearly in its 2Q11 earnings.

• Leading growth for the quarter was Microsoft’s Online Services Group and Server and Tools division, growing 17.2% and 15.7%, respectively, as the two businesses continued to enjoy solid performance.

• Failing to achieve significant positive year-to-year growth for the third consecutive quarter, however, was Microsoft’s Windows Division, as consumer PC shipment declines in mature markets and increased deployment of alternative devices across both the enterprise and consumer markets are having a tangible impact on the vitality of the Windows business.

Microsoft’s bet on Office 365 ensures the relevance of its core offerings

• To ensure continued vitality in its Office business, Microsoft continues to expand the business’ online capabilities. After its beta release in late 2010, Microsoft announced the official release of Office 365 in 40 countries in June.

• The release of Office 365 adds value across Microsoft’s existing suite of offerings, as the product is comprised of Microsoft Office, SharePoint Online, Exchange Online and Lync Online.

• Microsoft’s maturity in the enterprise and SMB markets is built around the vast presence of its Office software, providing productivity and email capabilities through locally installed software. With the launch of Office 365, Microsoft adds a layer of cloud capabilities to ensure the relevance of its core offerings as customers migrate to the cloud.

Microsoft added two new clutch partners to its Hyper-V Cloud Fast Track program

• The addition of NetApp and Cisco adds two established end-to-end infrastructure partners to Microsoft’s Hyper-V Cloud Fast Track program and helps validate Microsoft Hyper-V as a relevant virtualization solution.

• As Microsoft continues to add big-name players to its Hyper-V Cloud Fast Track roster, it positions the company to compete better against key virtualization competitors like VMware and EMC.

Executive Summary

TBR


Microsoft’s Office suite is delivering significant license revenue growth as adoption of Office 2010 and Office 365 ramps up

Segment Revenue Performance and Strategies

Segment Financials

New License

• New license revenue increased an estimated 8.3% year-to-year to $10.1 billion in 2Q11, as Office 2010 continued to be the fastest-selling version of Office to date.

• Only a month after its release, momentum is building around Office 365, as the solution expands presence in both the enterprise and SMB markets.

Maintenance Maintenance and support revenue totaled $4.1 billion in 2Q11, growing an estimated 12.0% year-to-year.

Consulting

• Microsoft’s professional services/consulting revenue increased 14.0% year-to-year to $812 million.

• Growth in Microsoft’s professional services/consulting revenue is a result of 15.7% year-to-year growth in its Servers and Tools division.

Executive Summary

0%

10%

20%

30%

40%

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

Per

cen

t o

f R

even

ue

MICROSOFT PERCENT REVENUE BY SEGMENT

Windows Division Server and Tools Online Services GroupMicrosoft Business Division Entertainment and Devices

TBR

SOURCE: TBR AND MICROSOFT

TBR

$9,263 $9,720 $11,176 $9,353 $10,040 $10,099

$3,680 $3,292 $3,434 $3,519 $4,121 $3,716

$932 $861 $955 $972 $1,059 $1,030

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

Perc

ent

of T

otal

Rev

enue

MICROSOFT SEGMENT CONTRIBUTIONS

Consulting Maintenance New License

*Dollar values listed in millionsSOURCE: TBR AND MICROSOFT

TBR

TBR

TBR


Microsoft leans on the Business Division as a viable revenue source as the Windows Division struggles to maintain consistent growth

Revenues

• Microsoft’s revenue grew 8.3% in 2Q11 to $17.37 billion – the company’s highest ever revenue total for a second quarter. Leading growth for the quarter were Microsoft’s Online Services Group and Server and Tools business, with 17.2% and 15.7% growth, respectively.

• While Microsoft’s Windows Division contributed the third highest revenue in 2Q11 ($4.74 billion), the division suffered its third consecutive quarter of incremental growth, as alternative devices, including mobile phones and tablets, depleted PC shipments. Expenses

• Cost of sales rose 17.0% year-to-year in 2Q11, increasing 160 basis points from 2Q10 to 21.4% of total revenue.

• Excess traffic and associated services cost continue to be a thorn in the side of Microsoft’s Online Services division, as the business unit operated at a loss of $728 million for the quarter.

Margins

Both gross and operating margins fell year-to-year, from 80.2% and 37.0% to 78.6% and 35.5%, respectively, as the Windows Division’s operating margin slipped 520 basis points to 62.1%.

Financial Model Strategy

$5,930 $6,171

$2,350 $2,393 $4,589 $5,095

$12,869 $13,659

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2Q10 2Q11

In $

mill

ion

s

Calendar Quarter

MICROSOFT OPERATING METRICS

Gross Income

SG&A

R&D

Operating Income


TBR

0%

10%

20%

30%

40%

50%

0%

10%

20%

30%

40%

50%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est. Re

ven

ue

Gro

wth

Ye

ar-

to-Y

ea

r

Mar

gin

MICROSOFT PROFITABILITY AND GROWTH

Operating Margin Net Margin Revenue Growth Year-to-Year


TBR

TBR


Industry-specific solutions across Microsoft’s Dynamics portfolio allow the company to squeeze additional revenue out of its Business Division

Product Strategies

• Foster cloud delivery to maintain relevance of core offerings

• Gear product functionality and capabilities toward SMB customers, delivering ease of use versus enterprise-level functionality

• Counter open-source threats with selective participation and risk mitigation

• Expand target markets by investing in consumer and enterprise products

• Provide well-received platforms to support partner customization and development

Services Strategies

• Enable and facilitate partner delivery of services and solutions to end-customers

• Participate in partner engagements as a product expert

• Increase annuity service agreements to provide revenue stability

• Deliver services to enterprise end-users, forging a direct relationship with Microsoft

• Deliver the education and training needed to foster the Microsoft ecosystem

Although not traditionally a vertically focused company, Microsoft’s push of its Dynamics portfolio across the Public Sector and Healthcare industry provide it with additional revenue streams

• TBR believes industry-specific solutions will continue to be essential to Microsoft’s product strategy, as market segmentation expands the applicability and revenue opportunities across the company’s portfolio.

• While Microsoft has not historically focused on targeting specific verticals, it is moving away from its traditional strategy to ensure the success of its business applications. Released in 2010, Microsoft’s Health Plan Sales Solution for its Dynamics CRM continues to drive customer adoption of its CRM solution across healthcare providers and insurance companies. With a network of 13 SI’s and ISV’s, Microsoft’s push of its CRM solution across the healthcare industry continues to drive revenue across the vertical.

• Microsoft displayed the capabilities of its Dynamics AX 2012 ERP solution in the public sector in 2Q11 at a product preview. Slated to be released in August 2011, Microsoft is positioning the solution to be deployed across specific verticals to maximize its revenue potential.

OS

DB

Apps

BI

MW

Consult

Premium

Base Support

Education

Software Stack

Services Offerings

Go-to-Market and Product Strategies

TBR


Indirect Sales Strategies

• Leverage partners to provide sales coverage across the globe

• Support partners with marketing resources, development funds and training/certification

• Implement tiered rebate programs to target specific markets or products

• Cooperate with partners on joint sales engagements

• Share support sales and delivery opportunities as a differentiator

Direct Sales Strategies

• Target largest accounts directly to meet customer needs for continuity and deep global relationships

• Partner with VARs and SIs to maintain channel involvement across all accounts

• Overcome customer apprehension regarding SaaS by offering Microsoft-hosted solutions

LE

SME

SMB

Consumer

10%

Estimated Microsoft Revenue Mix by LOB

25%

35%

30%

An established partner ecosystem and flexible solution deployment prepare Office 365 to dive head-first into the SMB market Flexible solutions based on monthly subscription rates and an established partner network improves Microsoft's ability to expand Office 365 across the SMB market • Priced between $2 and $27 per user per month, or $72 with an annual plan (compared to Google’s average $5 per user

per month, $50 annual fee), Office 365’s per usage pricing allows SMB customers to deploy specific options within Microsoft’s suite, including email, collaboration tools and Office software.

• Microsoft will work with its ecosystem of partners, including service providers AppRiver, InterCall and Premiere Global Inc., to drive adoption of Office 365. Partners will package Office 365 with their own solutions, ranging from mobility, finance and webhosting, to push Office 365 across the SMB market.

• TBR believes Microsoft’s established network of VARs, coupled with strategic pricing geared toward small- and medium-sized businesses, will allow Microsoft to drive its Office 365 solution across a customer segment with which it has traditionally not done significant business.

Go-to-Market and Product Strategies

TBR


Leadership changes will allow Microsoft to increase agility to capitalize on cloud opportunities

Strategy

• Microsoft’s Server and Tools president, Satya Nadella, appointed in 1Q11, highlighted the need to innovate cloud infrastructure to utilize customers growing data caches in the “post-virtualization era.” Future investment focus for Microsoft’s Server and Tools division will be centered on cloud deployment.

• Microsoft focused on partner collaboration in 2Q11, adding Hyper-V Cloud Fast Track partners NetApp and Cisco in 2Q11 to deepen its partner network and develop new offerings that promote its private initiatives.

Executive Changes

• Microsoft’s SVP of Strategy and Partnership, Henry Vigil, retired in 2Q11. Vigil will remain with the company through the fall and will continue to provide consulting services for Microsoft. His replacement has not been announced.

• Microsoft has appointed former chief information officer and corporate VP of Microsoft Online, Ron Markezich, to the new position of Corporate VP of Microsoft’s U.S. Enterprise and Partner Group

Resource Management Strategy

$-

$1,500

$3,000

$4,500

$6,000

$7,500

2Q10 3Q10 4Q10 1Q11 2Q11

Re

venu

e (

in $

Mil

lio

ns)

MICROSOFT REVENUE BY REGION

Americas OEM EMEA APAC

SOURCE: TBR & MICROSOFT

TBR

$5,806 $6,287

$3,272 $3,543

$2,611 $2,757

$4,350 $4,780

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2Q10 2Q11

In $

mill

ion

s

Calendar Quarter

MICROSOFT REVENUE BY REGION

OEM

APAC

EMEA

Americas


TBR

TBR


Income Statement

MICROSOFT CORP.

Consolidated Statement of Income

(in $ Thousands Except per Share Data)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

FISCAL QUARTER 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Est.

Net Sales 16,039,000$ 16,195,000$ 19,953,000$ 16,428,000$ 17,367,000$ 17,300,000$

Cost of Sales 3,170,000$ 3,139,000$ 4,833,000$ 3,897,000$ 3,708,000$ 3,806,000$

Gross Profit 12,869,000 13,056,000 15,120,000 12,531,000 13,659,000 13,494,000

Sales and Marketing 3,602,000 2,806,000 3,825,000 3,393,000 3,916,000 3,546,500

General and Administrative 987,000 938,000 945,000 1,160,000 1,179,000 1,055,500

Research and Development 2,350,000 2,196,000 2,185,000 2,269,000 2,393,000 2,260,750

Operating Income 5,930,000 7,116,000 8,165,000 5,709,000 6,171,000 6,631,250

Investment Income 94,000 114,000 332,000 316,000 148,000 227,500

EBITD 6,024,000 7,230,000 8,497,000 6,025,000 6,319,000 6,858,750

Provision for Income Taxes 1,506,000 1,820,000 1,863,000 793,000 445,000 1,372,000

Net Income 4,518,000$ 5,410,000$ 6,634,000$ 5,232,000$ 5,874,000$ 5,486,750$

Net Income per Share 0.51$ 0.62$ 0.77$ 0.61$ 0.69$

Diluted Shares Outstanding 8,821,000,000 8,695,000,000 8,570,000,000 8,510,000,000 8,521,000,000

AS A PERCENTAGE OF REVENUE

Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of Sales 19.8% 19.4% 24.2% 23.7% 21.4% 22.0%

Gross Margin 80.2% 80.6% 75.8% 76.3% 78.6% 78.0%

SG&A 28.6% 23.1% 23.9% 27.7% 29.3% 26.6%

R&D 14.7% 13.6% 11.0% 13.8% 13.8% 13.1%

Operating Margin 37.0% 43.9% 40.9% 34.8% 35.5% 38.3%

Investment Income (Expense) 0.6% 0.7% 1.7% 1.9% 0.9% 1.3%

EBITD 37.6% 44.6% 42.6% 36.7% 36.4% 39.6%

Income Taxes 9.4% 11.2% 9.3% 4.8% 2.6% 7.9%

Net Margin 28.2% 33.4% 33.2% 31.8% 33.8% 31.7%

YEAR-TO-YEAR CHANGE

Net Sales 22.4% 25.3% 4.9% 13.3% 8.3% 6.8%

Cost of Goods Sold 22.6% 10.5% 33.2% 41.5% 17.0% 21.2%

Gross Profit 22.4% 29.5% -1.8% 6.7% 6.1% 3.4%

SG&A 7.7% 6.0% 0.6% 4.5% 11.0% 22.9%

R&D and Engineering 5.6% 6.3% 5.1% 2.2% 1.8% 2.9%

Operating Income 48.7% 58.8% -4.1% 10.4% 4.1% -6.8%

Investment Income (Expense) -39.4% -59.7% -10.3% 88.1% 57.4% 99.6%

EBITD 45.4% 51.7% -4.3% 12.8% 4.9% -5.1%

Income Taxes 37.3% 52.8% -16.1% -40.6% -70.5% -24.6%

Net Income 48.4% 51.4% -0.4% 30.6% 30.0% 1.4%


TBR

TBR


Balance Sheet MICROSOFT CORP.

Consolidated Balance Sheets

(in $ Thousands)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11

FISCAL QUARTER 4Q10 1Q11 2Q11 3Q11 4Q11

ASSETS

Current Assets

Cash & Cash Equivalents 5,505,000$ 8,161,000$ 4,023,000$ 7,021,000$ 9,610,000$

Short-term Investments 31,283,000$ 36,012,000$ 37,299,000$ 43,129,000$ 43,162,000$

Accounts Receivable - Net 13,014,000 9,646,000 12,874,000 10,033,000 14,987,000

Deferred Income Taxes 2,184,000 2,344,000 2,548,000 2,586,000 2,467,000

Inventory 740,000 1,242,000 861,000 1,056,000 1,372,000

Other 2,950,000 2,176,000 2,149,000 2,438,000 3,320,000

Total Current Assets 55,676,000 59,581,000 59,754,000 66,263,000 74,918,000

Property, Plant, Equip. (Net of Dep.) 7,630,000 7,771,000 7,799,000 7,969,000 8,162,000

Other, Net 22,807,000 24,188,000 24,188,000 25,495,000 25,624,000

Total Assets 86,113,000$ 91,540,000$ 91,741,000$ 99,727,000$ 108,704,000$

LIABILITIES AND EQUITY

Current Liabilities

Accounts Payable 4,025,000$ 3,654,000$ 3,863,000$ 3,829,000$ 4,197,000$

Short-Term Debt 1,000,000$ 1,000,000$ -$ -$ -$

Accrued Compensation 3,283,000 2,252,000 2,402,000 2,917,000 3,575,000

Income Taxes Payable 1,074,000 2,136,000 1,439,000 839,000 580,000

Short-term Unearned Revenues 13,652,000 12,767,000 12,063,000 11,887,000 15,722,000

Securities Lending Payable 182,000 909,000 1,355,000 1,245,000 1,208,000

Other 2,931,000 3,139,000 3,190,000 3,325,000 3,492,000

Total Current Liabilities 26,147,000 25,857,000 24,312,000 24,042,000 28,774,000

Long-term Unearned Revenues 4,939,000 1,152,000 1,354,000 11,915,000 11,921,000

Other 8,852,000 17,589,000 17,333,000 9,133,000 9,470,000

Total Liabilities 39,938,000 44,598,000 43,825,000 46,275,000 51,621,000

Stockholders' Equity

Common Stock & PIC 62,856,000 61,935,000 61,646,000 63,234,000 63,415,000

Retained Earnings (16,681,000) (14,993,000) (13,165,000) (9,782,000) (6,332,000)

Total Stockholders' Equity 46,175,000 46,942,000 48,481,000 53,452,000 57,083,000

Total Liabilities & Equity 86,113,000$ 91,540,000$ 92,306,000$ 99,727,000$ 108,704,000$

FINANCIAL RATIOS

Days Sales Outstanding 73.0 53.6 58.1 55.0 77.7

Fixed Asset Turnover 8.6 8.4 10.3 8.3 8.6

Days Cash Outstanding 206.4 245.5 186.4 274.7 273.5

Total Asset Turnover 0.75 0.73 0.87 0.69 0.67

Debt/Asset Ratio 0.46 0.49 0.48 0.46 0.47

Current Ratio 2.13 2.30 2.46 2.76 2.60

Return on Assets 22.7% 24.2% 23.6% 24.0% 24.2%

Return on Equity 43.2% 45.9% 44.4% 45.3% 45.9%

Average Annual Revenue Per Employee 705,269$ 743,762$ 754,292$ 773,388$ 773,603$

Employee Count 88,596 88,414 88,414 88,720 90,412


TBR

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

About Us Technology Business Research is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, networking equipment, wireless, portal and professional services vendors. Serving a global clientele, TBR provides timely and accurate market research and business intelligence in formats that are tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. To learn how our analysts can address your unique business needs, please visit our website or contact us today.

Contact Us

1.603.929.1166 [email protected] www.tbri.com 11 Merrill Drive Hampton, NH 03842 USA

This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.

mailto:[email protected]

http://www.tbri.com/