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SOFTWARE BUSINESS QUARTERLYSMMicrosoft Corp.First Calendar Quarter 2011Third Fiscal Quarter 2011 Ended Mar. 31, 2011 TBR O...
Contents                                                                                             TBR    Company Analys...
TBR Position                                                                                                              ...
Executive Summary                                                                                                         ...
Executive Summary                                                                                                         ...
Strategy Overview                                                                                                        T...
Strategy Overview                                                                                                        T...
Strategy Overview                                                                                                       TB...
Corporate SWOT Analysis                                                                                       TBRThe acqui...
Scenario Discussion                                                                                                    TBR...
Scenario Discussion                                                                                                     TB...
Scenario Discussion                                                                                                    TBR...
Financial Model Strategy                                                                                                  ...
Financial Model Strategy                                                                                                  ...
Financial Model Strategy                                                                                                  ...
Go to Market & Product Strategies                                                                                        T...
Go to Market & Product Strategies                                                                                    TBRMi...
Alliance & Acquisition Strategies                                                                                         ...
Alliance & Acquisition Strategies                                                                                       TB...
Alliance & Acquisition Strategies                                                                                        T...
Alliance & Acquisition Strategies                                                                                    TBRMi...
Geographic Analysis                                                                                                       ...
Resource Management Strategy                                                                                              ...
Resource Management Strategy                                                                                        TBRMic...
Resource Management Strategy                                                            TBRMicrosoft Corp. 1Q11 Organizati...
Income Statement                                                                                                          ...
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
TBR 1Q11 Microsoft Company Report
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TBR 1Q11 Microsoft Company Report

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Technology Business Research is a different kind of research company. Our bottoms-up approach provides a look at the technology industry unlike anything you’ve seen before. We analyze company performance in professional services, networking and mobility, computing and hardware, and software on a quarterly basis, leveraging our data to create industry benchmarks and landscapes that provide a business perspective on leaders and laggards and their business plans. We are experts in the business of technology.

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Transcript of "TBR 1Q11 Microsoft Company Report"

  1. 1. SOFTWARE BUSINESS QUARTERLYSMMicrosoft Corp.First Calendar Quarter 2011Third Fiscal Quarter 2011 Ended Mar. 31, 2011 TBR OUTLOOK – POSITIVE TBR SCORE (0-10 SCALE)  6.27Publish Date: May 19, 2011Author: Allan Krans (allan.krans@tbri.com), Software Senior Analyst TBR T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .Content Editor: Stuart Williams, Software Practice Manager
  2. 2. Contents TBR Company Analysis Company Analysis 3 Executive Summary 26 Income Statement 6 Strategy Overview 27 Balance Sheet 9 Corporate SWOT Analysis 28 Business Unit Revenue Model 10 Scenario Discussion 29 Geographic Model 13 Financial Model Strategy 30 Headcount Model 16 Go-to-Market & Services Strategies 31 Operating Expense Model 18 Alliance & Acquisition Strategies 32 Financial Strategy Graphs 22 Geographic Analysis 33 Go-to-Market Graphs 23 Resource Management Strategy 34 Resource Management Graphs 26 Appendix 36 Future Outlook Graph 37 Acquisitions Table 40 Strategic Alliance Tables 46 Product Portfolio Table 47 About TBR2 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  3. 3. TBR Position TBRMicrosoft is re-examining long-held strategies and establishing newbusiness charters to ensure long-term growth TBR Assessment Corporate Strategic Objectives • Microsoft is realigning its core businesses in response Drive adoption of cloud services with Azure, Office to shifting market trends while continuing its forward Web Applications and Office 365 to offset cloud progress with cloud expansion initiatives. margin pressure with volume • The realignment of the next-generation Windows • Building cloud volume will be a long-term initiative operating system to run on ARM processors is an for Microsoft, but the company is gradually putting example of the way Microsoft is adjusting long-held the offerings and partnerships in place. strategies to capitalize on emerging trends such as the • A strategic partnership with Toyota, as well as proliferation of mobile computing. partner expansion in the media and entertainment • Cloud is not generating significant financial returns for industry, will expand the reach of Microsoft’s Azure platform into new verticals. Microsoft, but the company will maintain high levels of investment to expand its portfolio and win partner Maintain dominance of Windows and productivity commitment to build scale. software products to drive strong cash flow To address the second consecutive quarter of year-to- year declines in its core Windows division, Microsoft MSFT 1Q11 PERFORMANCE VS. EXPECTATIONS announced future ARM processor support and (in $ Millions) Consensus Guidance Range Actual Revenue $ 16,040 N/A $ 16,428 increased investments to position Azure as a cloud Operating Income N/A N/A $ 2,856 platform. Non- GAAP EPS $ 0.55 N/A $ 0.61 Expand presence in enterprise software (middleware and applications) to capture high-margin revenue MSFT 2Q11 GUIDANCE AND EXPECTATIONS growth (in $ Millions) TBR Estimate Consensus Guidance Range Microsoft announced the launch of Windows Intune Revenue $ 17,400 $ 17,380 N/A and System Center 2012 in 1Q11, cloud-based Operating Income $ 6,985 N/A N/A management and security platforms that will help Non-GAAP EPS N/A $ 0.60 N/A migrate additional Microsoft customers and partners to the cloud.3 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  4. 4. Executive Summary TBRContinued year-to-year declines in headcount enable Microsoftto remain highly efficient in GTM metrics CALENDAR QUARTER RESULTS TBR Company Average StandardTBR SCORING SUMMARY: 1Q10 2Q10 3Q10 4Q10 1Q11 FINANCIAL METRICS Score Figure in Class DeviationFinancial Model Strategy: 6.10 6.53 6.85 5.41 5.53 Gross Margin 4.94 76.3% 76.8% 10.7%Go-to-Market & Services Strategies: 8.04 8.11 8.17 8.18 8.22 SG&A as % of Revenue 7.23 27.7% 40.9% 11.9%Resource Management Strategy: 4.51 4.51 4.83 4.97 5.05 Sales & Marketing as % of Revenue 7.01 20.7% 31.1% 10.5% R&D as % of Revenue 5.22 13.8% 14.3% 4.5%TOTAL AVERAGE TBR SCORE: 6.22 6.38 6.62 6.19 6.27 Operating Margin 7.30 34.8% 19.3% 13.7% Net Margin 5.94 31.8% 18.3% 28.7% Revenue Growth YTY 4.90 13.3% 14.1% 16.0% Due to strong demand for core products such as Office Gross Profit Growth YTY 4.01 6.7% 14.0% 14.8% License Revenue Growth YTY 4.70 13.2% 15.8% 16.8% and Windows, Microsoft’s year-to-year revenue growth Maintenance Revenue Growth YTY 4.91 12.0% 13.0% 22.3% picked up in 1Q11, lifting its Financial Metrics score Professional Services & Consulting Revenue Growth YTY 4.73 12.4% 16.6% 31.4% back above peers’. Revenue growth, coupled with 5.53 TOTAL AVERAGE TBR SCORE shaved costs, enable Microsoft to sit above peers in TBR Company Average Standard both its Financial and Go-to-Market metrics, and GO-TO-MARKET & SERVICES METRICS Score Figure in Class Deviation ultimately its overall TBR score. Total Revenue per Employee** 10.00 $772.7 $313.3 $125.1 TBR Company Average Standard Annual Prof. Services Revenue per Service & Support Employee** 5.01 $175.1 $174.2 $153.6RESOURCE MANAGEMENT METRICS Score Figure in Class Deviation Annual Soft. License & MaintenanceDays Sales Outstanding 5.29 54.97 59.08 28.61 Revenue per Developer** 8.34 $1,478.3 $911.1 $339.4Fixed Asset Turnover 4.04 8.33 15.21 14.33 Annual Prof. Services/Consulting RevenueDays Cash Outstanding 6.43 274.74 187.23 122.02 per Salesperson** 4.77 $246.1 $281.6 $310.9Total Asset Turnover 5.64 0.69 0.61 0.22 Annual Software LicenseDebt/Asset Ratio 5.31 0.46 0.48 0.12 Revenue per Salesperson** 10.00 $3,225.5 $629.8 $522.2Current Ratio 8.45 2.76 1.59 0.67 Annual MaintenanceReturn on Assets 9.38 0.24 0.07 0.08 Revenue per Salesperson** 9.43 $1,134.5 $527.7 $273.9Return on Equity 7.88 0.45 0.15 0.21 Annual Revenue per Salesperson** 10.00 $4,606.1 $1,439.2 $702.3Annual Sales & Marketing Expense per TOTAL AVERAGE TBR SCORE 8.22Sales & Marketing Employee** - $585.5 $319.4 $90.0 Key ■ Represents an area where Microsoft is currently challenged versus peersAnnual G&A Expense per G&A Employee** 0.47 $491.7 $251.0 $105.7 ■ Represents an area where Microsoft is outperforming its peersAnnual R&D Expense per Developer** 2.69 $248.6 $161.7 $75.4 ■ Represents an area where Microsoft is neither significantly outperforming norTOTAL AVERAGE TBR SCORE 5.05 underperforming its peers * In thousands4 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  5. 5. Executive Summary TBRCore products remain the financial base for Microsoft to execute onhigh-growth opportunities in future quartersTBR assessment of Microsoft’s two-year strategic outlookKey Takeaways Strategic Outlook Financial: Drive revenue growth from core • Microsoft will continue expanding the applicability and products, including Microsoft Office, Windows OS availability of its Windows and Office products to reach new and current customers. and Xbox 360. • Entertainment & Devices, specifically Xbox 360 and Kinect, Go to Market: Develop new offerings to capture will drive revenue growth in coming quarters as Microsoft high-growth areas in the cloud and appliance integrates Skype into its communications portfolio. markets. • Partners and resellers will continue to be a crucial channel Resource: Continue to invest in partner program for Microsoft to promote its core products, as well as new offerings in the cloud and appliance markets. enhancements to maintain the indirect channel as • Microsoft’s Azure cloud ecosystem will be the critical link Microsoft’s primary go to market route. for the company to transfer existing distribution MICROSOFT NET REVENUE, GROWTH AND PROJECTIONS partnerships to cloud services. TBR • Microsoft will broadly utilize the Azure platform, attracting Net Revenue Growth Year-to-year $80 30.0% $70 25.3% 25.0% customers, partners and development investments across $60 22.4% 20.0% new verticals in CY11. $50 In $ Billions 13.6% $40 13.3% 15.0% • Microsoft will continue to face competition in the cloud 8.5% $30 $20 6.3% 4.9% 5.0% 7.5% 10.0% computing market from vendors such as Salesforce.com, $10 5.0% Google, Amazon, HP, IBM and EMC; however, Microsoft $0 0.0% continues to move forward with its cloud strategy and 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 CY10 CY11 CY12 Est. Est. Est. release new products. Net Revenue Revenue Growth Year-to-YearNOTE: Annual revenue and projections are for calendar 2010, 2011 and 2012, respectively.SOURCE: MICROSOFT AND TBR5 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  6. 6. Strategy Overview TBRMicrosoft continues to rely on core products, such as Windows andOffice, while looking to expand in new growth markets Function Key Strategies TBR Assessment  Incremental growth in Microsoft’s Windows Division cut into the product line’s margins in Preserve position in Windows and Office 1Q11. As Microsoft’s second-highest contributing products to maintain division, it is crucial for the company to restore revenue and profitability growth in its Windows Division to maintain high streams. levels of corporate profitability. Overall ►  In 1Q11, Microsoft ended its x86 processor Promote cloud, mobile exclusivity with Intel and announced additional and appliance portfolios to support of AMD and ARM SoC architectures, increase revenue in empowering the company to expand the growing markets. availability of its core Windows products to more devices, including smartphones and tablets.  User adoption of Windows Phone 7 continues to progress slowly, but the Skype acquisition could Make investments in the bolster adoption. Financial cloud and mobile markets ►  Microsoft expanded the market presence of the to grow with the market. Azure platform into new verticals, arming partners to better compete within specific verticals with cloud solutions. Key:  Working: Short-term impact expected on bottom / top line  Not working: No major impact or differentiation expected6 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  7. 7. Strategy Overview TBRMicrosoft continues to rely on core products, such as Windows andOffice, while looking to expand in new growth markets (cont.) Function Key Strategies TBR Assessment Extend portfolio in high-  The Online Services Group continues to growth areas like cloud contribute relatively minimal revenue, and and appliance markets. requires significant investment that could be used to fund more promising investments or bolster Go to Market Increase buy-in from ► profitability. partners, as Microsoft  Microsoft improved its developer network in expands cloud offerings to 1Q11 with new cloud-centered training and SMBs. accessibility tools for developers.  Microsoft’s acquisition of Skype was the largest Focus on acquisitions to acquisition in company history, and will add a expand product functionality, helping layer of functionality to Microsoft’s Microsoft enhance its communications capabilities, allowing the current portfolio. company to better compete across both the Alliances & ► consumer and business markets. Acquisitions Establish strong  Microsoft continued to enhance its partner partnership ecosystem to network in 1Q11, establishing partnerships in the offload the burden direct automotive and media and entertainment (M&E) sales, and drive adoption of Microsoft products. markets to drive the adoption of its Azure platform. Key:  Working: Short-term impact expected on bottom / top line  Not working: No major impact or differentiation expected7 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  8. 8. Strategy Overview TBRMicrosoft is investing to capture long-term revenue growth in thecloud market Function Key Strategies TBR Assessment Utilize partners to cost-  Microsoft maintains a strong commitment to its Operations & effectively resell products partner network that provides advantages in cost- ► GDM and deliver services effectively developing and delivering software worldwide. solutions.  Microsoft’s appliance strategy hinges on outside Begin investing more vendors and partners to add the hardware layer heavily to enhance to their appliance offerings. Significant investment product offerings in in partner development will be crucial for appliance market. Microsoft’s appliance strategy to become a viable Resources & ► business model. Investment Invest in growth  While cloud promises to generate revenue growth opportunities to drive in the long run, heavy investment in the short long-term revenue growth term comes at a cost, as Microsoft continues to across portfolio. rely on its core products to fund investments that will not see an immediate monetary return. Key:  Working: Short-term impact expected on bottom / top line  Not working: No major impact or differentiation expected8 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  9. 9. Corporate SWOT Analysis TBRThe acquisition of Skype expands Microsoft’s communicationsopportunities in both the consumer and business markets Corporate SWOT Analysis Strengths Opportunities • Core segments, Windows and Office, continue to be • Use Skype acquisition to integrate Windows leaders in the market. Phone 7, Xbox 360 and Kinect, and Windows OS to • Increasing recognition in database, middleware and expand communications capabilities across business application markets. and consumer markets. • Established brand name reassures potential • Provide continual upgrades around resources and partners to adopt Microsoft technology. incentives for partners to adopt Microsoft’s • Partner-based distribution model enables wide and portfolio. efficient sales coverage. • Diverse portfolio allows Microsoft to achieve revenue growth in new and growing markets across the globe, like healthcare IT and media and entertainment. Weaknesses Threats • Systems vendors threaten to take market share • Established players in the appliance space, such as from Microsoft as customers look for all-in-one EMC and IBM, threaten Microsoft’s entry into the hardware/software solutions. market. • Investments for expansion into new markets and • Vertical expansion causes hesitation from partners verticals take significant upfront investment. questioning profitability. • Lack of experience in the appliance market • Pure-play cloud companies, such as Google, threatens customer adoption. threaten Microsoft’s desktop software model.9 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  10. 10. Scenario Discussion TBRMicrosoft continues to rely on partnerships to expand portfolio intonew verticals and revenue streams Scenario Discussion: Microsoft’s vertical expansion through partnerships Scenario SWOT Assessment Strength: Established brand name is • TBR believes Microsoft’s expansion into new verticals is dependent on partners to help drive new sources of reassuring to potential partners. revenue and strengthen Microsoft’s overall position against Weakness: Vertical expansion through competitors across industries. partners is more focused on SMB customers rather than enterprise market. • In 1Q11, Microsoft expanded its vertical reach through partnerships in the healthcare, automotive and Opportunity: Expand partner ecosystem entertainment industries, while also releasing products to across verticals. directly target the education and retail verticals. Threat: Possible hesitation from partners • Microsoft announced the development of a partner regarding unproven verticals. ecosystem to drive cloud adoption within the media and entertainment (M&E) industry in 1Q11. Focused on Microsoft’s successful partner network, the new partner ecosystem will help drive adoption of Microsoft’s Azure platform within the M&E industry. • To fully take advantage of the opportunities growing verticals present, Microsoft couples partnerships with organic vertical expansion and new product releases. • Partnerships allow Microsoft to focus on the development of its portfolio and platform, while allowing partners to add a layer of customization to attract customers to Microsoft’s SOURCE: MICROSOFT offerings.10 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  11. 11. Scenario Discussion TBRMicrosoft expands its partner network to drive adoption across therapidly growing healthcare market Scenario Discussion: Microsoft’s healthcare vertical expansion Scenario SWOT Assessment • Microsoft’s portfolio of healthcare solutions continues to grow Strength: Numerous partnerships in as the company works to fully take advantage of the quickly healthcare IT help reinforce Microsoft’s evolving industry through partnerships and new product credibility in the market. releases. Weakness: Security is a critical • In 1Q11, Microsoft focused on further expansion into the consideration for Health IT, which is not a healthcare market by relying on partnerships and new product traditional Microsoft strength. releases to drive further into the emerging market. Opportunity: Healthcare IT shows strong • Microsoft formed three partnerships in 1Q11 targeting the revenue growth opportunities for software healthcare vertical: athenahealth, Royal Philips Electronics NV vendors. and Dell and Stellaris Health Network. Threat: Unclear path of what direction • All three partnerships reinforce Microsoft’s healthcare strategy healthcare IT is heading in as an industry. to create solutions that simplify processes for healthcare providers, and improve communication across hospitals, doctors and patients. • Microsoft also released its State Health Insurance Exchange in 1Q11 to help states create a interoperable architecture that allows insurance information to be exchanged across both public and private healthcare systems. • The healthcare vertical is undergoing rapid change, as organizations within the industry work to become more digital and computerized. This transformation opens up many new opportunities for software vendors to create solutions tailored to the industry and specific customer needs, such as record SOURCE: MICROSOFT organization.11 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  12. 12. Scenario Discussion TBRIncreased demand for end-to-end solutions has led Microsoft to dipits feet into the appliance market Scenario Discussion: Microsoft’s gradual entrance into the appliance business Scenario SWOT Assessment Strength: SAP partnership adds layer of • TBR believes Microsoft will continue to establish its appliance capability that competing appliances lack. business, as customers continue to demand all-in-one hardware and software solutions. Weakness: Lack of experience in the • At the end of 4Q10 Microsoft partnered with HP to deliver the market threatens customer adoption. HP Database Consolidation Appliance. While the tight Opportunity: Appliance market quickly integration of software and hardware is an area of expansion, gaining momentum. Microsoft has been working to integrate software solutions Threat: More established appliance with partners, recently announcing an expanded partnership vendors like EMC and IBM threaten with SAP to deliver the Duet Enterprise, which combines Microsoft’s entry into the market. Microsoft SharePoint with SAP solutions. • Previously, Microsoft focused on delivering its software solutions through traditional hardware delivery models; it is now diversifying its delivery methods by dipping into the appliance business to meet customer demand for solutions. • Companies are increasingly demanding all-in-one solutions as the lines between hardware and software begin to blur. The plug-and-play capabilities appliances offer are very attractive to customers seeking easily implemented solutions to complex IT problems. To compete and address this new demand, more companies are entering into the appliance business, including Microsoft. • As Microsoft continues to dip into the appliance market, it will position itself for future growth and to compete on a more direct level with large players Oracle, HP and IBM. SOURCE: MICROSOFT12 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  13. 13. Financial Model Strategy TBRCore Microsoft products Office 2010 and Windows continue tocontribute the highest proportion to revenue in 1Q11 Revenue Performance and Product Strategies 1Q11 Net Revenue: $16.4 billion, 13.3% YTY TBR MICROSOFT REVENUE AND PROFITABILITY • Microsoft’s double-digit year-to-year revenue growth $25,000 100% was mainly attributable to strong performance of 90% $20,000 80% Windows Server, SQL database, Microsoft Office and In $ Millions 70% $15,000 60% the increased adoption of cloud services. 50% $10,000 40% 30% • Microsoft’s Business Division led year-to-year growth $5,000 20% 10% in 1Q11 at 23.8%, while also comprising the highest $- 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 proportion of total revenue at 32.0%. This growth can Est. be attributed to increased Office sales with PC Total Revenue Operating margin Gross Margin shipments. SOURCE: TBR AND MICROSOFT • Despite an increase in enterprise demand for Windows 7, consumer PC shipments continued to TBR decrease in 1Q11, slowing the overall growth of MICROSOFT SEGMENT CONTRIBUTIONS TBR $868,264 $853,727 $954,673 $944,290 Microsoft’s Windows Division to 0.7% from 1Q10. 100% $861,387 $972,290 90% Revenue and Growth Outlook Percent of Total Revenue 80% $3,142,200 $3,679,587 $3,291,973 $3,433,711 $3,519,264 $3,716,383 70% 60% • TBR expects Microsoft’s Entertainment and Devices 50% 40% division to lead year-to-year growth in 2Q11 with just $11,175,616 30% $8,261,536 $9,340,686 $9,719,640 $9,353,446 $10,185,167 over 23% year-to-year growth, as the demand for 20% 10% Xbox, and Xbox Kinect continues to increase. 0% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. • In 2Q11, TBR estimates total revenue will increase Consulting Maintenance New License approximately 8.5% year-to-year to $17.4 billion, as SOURCE: TBR AND MICROSOFT cloud solutions, including Office 365 and Windows Intune, gain traction in the market.13 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  14. 14. Financial Model Strategy TBRMicrosoft’s margins continue to suffer due to high volume costs in theEnterprise Services and Entertainment and Devices divisions Cost & Margin Performance and Strategy 1Q11 Operating Expenses: $10.7 billion TBR MICROSOFT PERCENT EXPENSE BY FUNCTION • Higher expenses resulted from high 30.0% services volume within the enterprisePercent of Revenue 25.0% market, growth of the Entertainment 20.0% 15.0% and Devices division, and costs 10.0% COGS, associated with Microsoft’s alliance 5.0% Gross Profit with Yahoo. 0.0% • In 1Q11, Microsoft’s gross profit rose 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 6.7% year-to-year to $12.5 billion. COGS S&M G&A R&D Est. • Cost of sales increased 41.5% year-to-SOURCE: TBR AND MICROSOFT year to 23.7% of total revenue. MICROSOFT GROSS AND OPERATING PROFIT • R&D expenses rose 2.2% year-to-year in TBR AND PROJECTIONS 1Q11, to $2.3 billion. 100% SG&A & • SG&A expense increased 4.5% year-to- R&D 80% year in 1Q11, but fell 230 basis points Gross and Operating Margin 60% as a percentage of revenue to 27.7%. 40% • Operating margin decreased to 34.8% in 1Q11 from 35.7% in 1Q10. 20% Operating • TBR believes Microsoft’s operating Margin and 0% margin will increase in 2Q11 to 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 CY10 CY11 CY12 Outlook Est. Est. Est. approximately 40% as top-line revenue Gross Margin Operating Margin growth will outpace expenses. NOTE: Annual gross and operating profit and projections are for calendar 2010, 2011 and 2012, respectively. SOURCE: TBR AND MICROSOFT 14 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  15. 15. Financial Model Strategy TBROffice 2010 and Microsoft’s Business Division lead revenue growthin 1Q11 Segment Revenue Performance and Strategies Segment Financials TBR MICROSOFT SEGMENT REVENUE Microsoft Windows Division grew 0.7% $18,000 Windows & $16,000 $648 year-to-year as Windows 7 maintains $14,000 $566 $1,935 Online Services Group Windows Live momentum in the enterprise market. $1,665 In $ Millions $12,000 $4,104 Entertainment and $10,000 $3,575 Devices $8,000 $4,445 Server and Tools Server & Tools grew 14.8% year-to-year $6,000 $4,415 in 1Q11, due to strong demand for $4,000 Windows Division Server & Tools Windows Server Premium, SQL Server $2,000 $4,243 $5,252 Microsoft Business $- Division Premium and System Center. 1Q10 1Q11 Calendar Quarter Online Services grew 14.5% year-to- Online Services SOURCE: TBR AND MICROSOFT year as Bing continues to gain market Group share in the U.S. TBR TBR MICROSOFT PERCENT REVENUE BY SEGMENT 40% Microsoft Office (comprised of Office, SharePoint, Exchange and Lync) as well Microsoft 30% as Microsoft Dynamics CRM drove Percent of Revenue Business Division MBD’s revenue growth of 23.8% in 20% 1Q11. 10% Entertainment & Devices reported 0% Entertainment & 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. 16.2% year-to-year growth, driven Windows Division Microsoft Business Division Server and Tools Entertainment and Devices Online Services Group Devices primarily by Xbox Kinect and Xbox 360. SOURCE: TBR AND MICROSOFT15 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  16. 16. Go to Market & Product Strategies TBRMicrosoft is diversifying its product offerings under the umbrellatheme of cloud computing Microsoft’s “we’re all in” cloud strategy is universal, as shown by its commitment to spend 90% of its R&D budget on its cloud solution strategy in 2H11 • Microsoft announced the release of System Center 2012 and Windows Intune, two private-cloud centered solutions that broaden Microsoft’s capabilities within enterprise systems management. System Center 2012 is specifically engineered for high-performing collaboration with Hyper-V. • In 1Q11, Microsoft announced a partnership with Toyota, and will jointly develop a solution through Azure (Microsoft’s dedicated cloud development platform) to provide advanced telematics services for Toyota customers – launching an innovative partnership and extending Microsoft’s cloud brand into a new segment. TBR Position • TBR believes slow growth in mature markets will continue to force Microsoft to adapt its products into cloud- based solutions to maintain growth and market share within the emerging cloud market. Product Strategies Software Services Services Strategies Stack Offerings • Gear product functionality and capabilities • Enable and facilitate partner delivery of toward SMB customers, delivering ease of services and solutions to end-customers. BI Consult use versus enterprise-level functionality. • Participate and cooperate in partner • Counter open source threats with engagements as a product expert. selective participation and risk mitigation. Apps Premium • Increase annuity service agreements to • Expand target markets by investing in provide revenue stability. consumer and enterprise products. MW • Deliver services to enterprise end-users, • Leverage desktop strength as customers Base forging a direct relationship with Microsoft. transition to SaaS. DB Support • Deliver the education and training needed • Provide well-received platforms to to foster the Microsoft ecosystem. support partner customization and OS Education development.16 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  17. 17. Go to Market & Product Strategies TBRMicrosoft will jump-start growth in mature markets through the useof verticalization and partnerships Vertical markets are a substantial portion of Microsoft’s expansion plan, as mature software markets are driving vendors to search for new sources of revenue growth • Microsoft’s vertical expansion in 2011 will hinge upon growing its partner network, enabling the company to capitalize on opportunities presented by growing verticals. • Key partnerships with Dell and Stellaris Health Network, as well as with athenahealth, helped Microsoft expand into the healthcare industry by offering web-based analytics and collaboration services to hospitals. • In 1Q11, Microsoft announced a new partner ecosystem directed toward the media and entertainment industry (M&E), focused on guiding M&E customers into the cloud via Microsoft’s Azure platform. TBR Position • TBR believes the continued expansion of Microsoft’s partner ecosystem and programs will enable the company to expand into other industry segments, not just M&E – a critical move for the company to overcome slowed growth in mature markets. Estimated Microsoft Revenue Indirect Sales Strategies Mix by LOB Direct Sales Strategies • Leverage partners to provide sales • Target largest accounts coverage across the globe. 10% directly to meet customer LE needs for continuity and • Support partners with marketing resources, development funds and 25% deep global relationships. training/certification. SME • Partner with VARs and SIs to • Implement tiered rebate programs maintain channel to target specific markets or involvement across all 35% products. accounts. SMB • Overcome customer • Cooperate with partners on joint sales engagements. apprehension regarding SaaS 30% through offering Microsoft- • Share support sales and delivery Consumer hosted solutions. opportunities as a differentiator.17 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  18. 18. Alliance & Acquisition Strategies TBRMicrosoft acquires Skype to be the communications anchor across itsportfolio Acquisition/Alliance Assessment Acquisition Strategy Skype will be the glue that holds together Microsoft’s consumer communications business The Skype acquisition (the largest in the • Just after its 1Q11 earnings release in May, Microsoft announced the company’s history at $8.5 billion) will support acquisition of Skype for $8.5 billion cash. While Microsoft will most Microsoft’s communication capabilities from likely not see direct profit from Skype, the acquisition helps galvanize a functional, but likely not a financial, Microsoft’s communications offerings across both the consumer and perspective. Skype will provide the business markets. functionality for Microsoft to fully integrate • TBR believes the acquisition of Skype positions Microsoft to go toe-to- its communications across devices in both the toe with Apple’s FaceTime, Google Video Chatting in the consumer consumer and business markets. space, and Cisco’s WebEx and TelePresence offerings in the enterprise market. • Skype, a company known for providing video and voice calling capabilities on PCs and mobile phones via the Internet, brings to Microsoft approximately 660 million active users across consumer and business markets. • The addition of Skype allows Microsoft to effectively integrate its existing products in all three spaces, including Microsoft Office Platform and Windows OS on PCs, Windows Phone 7, and the Xbox 360 and Kinect, attracting consumers with an unprecedented communication opportunity. • Microsoft can utilize Skype to bolster its LiveMeeting offering, allowing enterprise users to communicate and collaborate with each other in live meetings across mobile devices, PCs and tablets, through voice SOURCE: SKYPE and video capabilities.18 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  19. 19. Alliance & Acquisition Strategies TBRPartnerships and acquisitions enable Microsoft to monetize growingmarket opportunities Key Microsoft Partner and Acquisition Announcements Acquisition/ Action Impact or Changes Partner Skype brings a level of functionality to Microsoft’s communication portfolio that will allow Microsoft to compete with major players in both the business and consumer Acquire Skype Skype markets. Integration of Skype will allow Microsoft’s Live Meeting to compete with the likes of Cisco’s TelePresence and WebEx in the business market, and Apple’s FaceTime in the consumer market. Announced Microsoft and Toyota formed a strategic partnership build a global platform for partnership Toyota Toyota’s Telematics services. The platform will be built using the Windows Azure with Toyota platform, and will extend Microsoft’s vertical reach into the automotive industry. Announced Dell & Microsoft partnered with Dell & Stellaris Health Network to create and deliver partnership Stellaris analytics, informatics and business intelligence SaaS solutions for community with Dell & hospitals. The solution was developed with Stellaris, a community hospital system Health Stellaris Health and combines Microsoft Amalga, and with Dell’s cloud infrastructure. Network Network Microsoft’s acquisition of Canesta will grant Microsoft the access to Canestas 3-D Acquire sensor chip, enabling the company to capitalize on 3-D sensing technology and Canesta expand beyond gaming and Kinect to use the technology in other devices. Microsoft Canesta also received Canesta’s customer contracts, expanding Microsoft’s customer base. The acquisition of AVIcode will provide Microsoft customers with a new set of Acquire software to help monitor applications in a .NET framework. The software will AVIcode provide managers an end-user point of view for services while also bridging AVIcode datacenter and cloud service applications.19 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  20. 20. Alliance & Acquisition Strategies TBRPartnerships and acquisitions enable Microsoft to monetize growingmarket opportunities (cont.) Key Microsoft Partner and Acquisition Announcements Acquisition/ Action Impact or Changes Partner The purchase of Sentillion continues to drive Microsoft’s healthcare Acquire Sentillion industry impact and will add to the outcome of Health Solutions Group’s Sentillion medical applications. Announced Microsoft will combine its Azure platform with Intuit’s Partner Platform, allowing developers and channel partners to deliver enhanced solutions to partnership with Intuit QuickBooks users. Microsoft plans to extend access for QuickBooks users to Intuit Microsoft Online services through the Intuit App Center. NetApp and Microsoft have engaged in a three-year agreement to enhance Announced collaboration and technical solutions. The solutions will allow improved communications and informed decision-making while lowering costs, agreement with NetApp increasing performance and reaching new efficiency levels. Through this NetApp agreement, Microsoft will push cloud computing flexibility and host service solutions. In February, Eclipsys and Microsoft announced an agreement to deliver Announced healthcare IT solutions that allow medical professionals to access data across multiple clinical and financial systems in the hospital. The solutions Partnership Eclipsys will combine Eclipsys’ industry-leading Sunrise Enterprise with Microsoft’s With Eclipsys Amalga UIS to enhance analytic capabilities, allowing hospitals to connect as a whole.20 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  21. 21. Alliance & Acquisition Strategies TBRMicrosoft leverages four key programs to advance partner-drivenbusiness Key Microsoft Partner Programs Program Targets Impact or Changes • MPN replaces MPP (Microsoft Partner Program), providing a greater focus on Microsoft Microsoft’s certifications and partner differentiation. Partner global partner • With >95% of revenue generated through partners, channel conflict is minimal Network (MPN) program to non-existent. • Microsoft’s training/certification programs make platform skills plentiful. Microsoft Microsoft’s • MSDN retains a strong following in the desktop developer community. Developer developer • Oracle, IBM and open-source alternatives present competition for enterprise- Network focused developers. community (MSDN) • Cloud Essentials and Cloud Accelerate are Microsoft’s first cloud-specific Resellers and partner programs, introduced at the Worldwide Partner Conference in 2010. Cloud Essentials SIs • Both programs provide internal use rights for Microsoft cloud services and and Accelerate training, and Accelerate provides enhanced support for cloud sales and implementation activities. Microsoft • MSPA is a single support program for ISVs and SIs that provides technical and Partner advisory support to reduce risk in working with Microsoft technology. Advantage ISVs and SIs • MSPA is a flexible program that provides a single contact point for partners (MSPA) with Microsoft across the development and deployment lifecycle, with a focus on building partner business and end-user success.21 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  22. 22. Geographic Analysis TBRAlthough the Americas contributes the most revenue, APAC continuesto outpace other regions in year-to-year growthGeographic Revenue Strategies MICROSOFT REVENUE BY REGION Revenue from the Americas grew 9.3% year-to-year TBR $7,500 U.S./ in 1Q11, and the region continues to contribute the Americas highest proportion to total revenue, at 36.2% this $6,000 $5,947 quarter. Growth in the Americas is mainly within the Revenue (in $Millions) $4,500 million U.S, as demand for products such as Xbox 360 remains high. $3,000 Unstable economic conditions in EMEA continue to $1,500 EMEA cause Microsoft’s performance in the region to $- fluctuate, as reflected by inconsistent positive and 1Q10 2Q10 3Q10 4Q10 1Q11 $3,351 negative year-to-year revenue growth in recent million Americas OEM EMEA APAC quarters. Microsoft improved incrementally in theSOURCE: TBR & MICROSOFT region in 1Q11, posting 3.6% growth on the year. Although APAC contributes the lowest proportion to MICROSOFT REVENUE BY REGION APAC TBR total revenue, the region continues to outpace $18,000 OEM $2,780 other regions in growth, with a 55.3% year-to-year $16,000 $14,000 $4,350 Million increase in 1Q11. APAC’s rapid adoption of IT opens In $ millions $12,000 $4,040 APAC $10,000 $1,790 $2,780 many growth opportunities for Microsoft. $8,000 $3,351 EMEA $3,234 $6,000 $4,000 Americas OEM OEM revenue grew 7.7% year-to-year in 1Q11, $5,439 $5,947 $2,000 accounting for 26.5% of total revenue – down 140 $0 $4,450 1Q10 1Q11 basis points from 1Q10. Calendar Quarter SOURCE: TBR AND MICROSOFT22 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  23. 23. Resource Management Strategy TBRNew leaders will advance Microsoft’s cloud and enterprise strategiesfrom planning to execution TBR Strategy TBR MICROSOFT TWO-YEAR EMPLOYEE EXPENSE • Following difficult prior quarters, Microsoft Expense per Employee (Annualized) $600,000 100,000 Number of Microsoft Software remains focused on consolidating and $500,000 95,000 $400,000 strengthening Americas revenue growth. 90,000 Employees $300,000 • Microsoft will balance that commitment with $200,000 85,000 planned investment in international markets as $100,000 80,000 well as in segment-centric product solutions. $0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 75,000 Est. Operating Expense Per Employee Number of Employees Executive Changes SOURCE: TBR AND MICROSOFT • Satya Nadella was promoted to President of Microsoft’s Servers & Tools Business, and brings experience in both business applications and cloud MICROSOFT HEADCOUNT services to the role. TBR 100,000 3,800 3,800 • TBR believes Nadella’s appointment reinforces 90,000 80,000 8,719 8,196 Manufacturing & Microsoft’s goals of adapting its core product set to Total Headcount 70,000 17,500 17,250 Distribution the cloud. 60,000 General & Administrative 50,000 • Microsoft appointed Chris Capossela as SVP of the 40,000 36,465 36,200 Services Consumer Channels and Central Marketing Group, 30,000 Research & 20,000 a new group that combines Microsoft’s Retail, 10,000 23,517 23,274 Development Mobile Operator and Distribution units. 0 Sales & Marketing 1Q10 1Q11 • Executives exiting include Mich Mathews (SVP of Calendar Quarter Central Marketing) and Kevin Timmons (GM of Datacenter Services), who has defected to Apple. SOURCE: TBR AND MICROSOFT23 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  24. 24. Resource Management Strategy TBRMicrosoft continues to cut headcount across the board year-to-yearas it works to trim expenses Est. 1Q11 Growth Function Key Changes & Drivers Keep on the Radar FTEs YTY Although Microsoft’s Sales & Marketing Microsoft’s Sales & Marketing headcount is expected to rise expense has been increasing to support Sales & 0.9% year-to-year to 23,296 product innovation, it is not reflected in 23,274 –1.0% Marketing employees in 2Q11, as continued headcount, as Microsoft cut S&M innovation will increase sales and headcount by 500 FTEs from 1Q10. marketing need. Microsoft continues to cut G&A headcount TBR expects Microsoft’s G&A at a rate of 6.0% per year, as the company headcount to increase General & works to trim overhead costs. Sequentially, 8,196 –6.0% incrementally in 2Q11 as Admin Microsoft integrates Skype into its headcount declined by approximately 112 FTEs. business. Although Microsoft’s R&D expenses increased in 1Q11, it did not translate to a TBR believes R&D headcount will year-to-year headcount increase. fall back to its previous level of R&D 36,200 –1.3% 36,000 employees in 2Q11, and Sequentially however, R&D headcount rose by roughly 200 FTEs due to the integration remain flat year-to-year. of Canesta. Services & Support headcount continues to Despite increased demand for Services & remain flat at 17,250 employees, with services and support, Microsoft’s 17,250 –0.7% Support 1Q11 the fourth consecutive quarter of headcount remains flat at 17,250 incremental growth. from quarter to quarter.24 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  25. 25. Resource Management Strategy TBRMicrosoft Corp. 1Q11 Organizational Chart25 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
  26. 26. Income Statement TBR MICROSOFT CORP. Consolidated Statement of Income (i n $ Thous a nds Except per Sha re Da ta ) TBR CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. FISCAL QUARTER 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Est. Net Sales $ 14,503,000 $ 16,039,000 $ 16,195,000 $ 19,953,000 $ 16,428,000 $ 17,400,000 Cost of Sales $ 2,755,000 $ 3,170,000 $ 3,139,000 $ 4,833,000 $ 3,897,000 $ 3,654,000 Gross Profit 11,748,000 12,869,000 13,056,000 15,120,000 12,531,000 13,746,000 Sales and Marketing 3,203,000 3,602,000 2,806,000 3,825,000 3,393,000 3,567,000 General and Administrative 1,152,000 987,000 938,000 945,000 1,160,000 956,667 Research and Development 2,220,000 2,350,000 2,196,000 2,185,000 2,269,000 2,237,750 Operating Income 5,173,000 5,930,000 7,116,000 8,165,000 5,709,000 6,984,583 Investment Income 168,000 94,000 114,000 332,000 316,000 177,000 EBITD 5,341,000 6,024,000 7,230,000 8,497,000 6,025,000 7,161,583 Provision for Income Taxes 1,335,000 1,506,000 1,820,000 1,863,000 793,000 1,790,000 Net Income $ 4,006,000 $ 4,518,000 $ 5,410,000 $ 6,634,000 $ 5,232,000 $ 5,371,583 Net Income per Share $ 0.45 $ 0.51 $ 0.62 $ 0.77 $ 0.61 Diluted Shares Outstanding 8,876,000,000 8,821,000,000 8,695,000,000 8,570,000,000 8,510,000,000 AS A PERCENTAGE OF REVENUE Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 19.0% 19.8% 19.4% 24.2% 23.7% 21.0% Gross Margin 81.0% 80.2% 80.6% 75.8% 76.3% 79.0% SG&A 30.0% 28.6% 23.1% 23.9% 27.7% 26.0% R&D 15.3% 14.7% 13.6% 11.0% 13.8% 12.9% Operating Margin 35.7% 37.0% 43.9% 40.9% 34.8% 40.1% Investment Income (Expense) 1.2% 0.6% 0.7% 1.7% 1.9% 1.0% EBITD 36.8% 37.6% 44.6% 42.6% 36.7% 41.2% Income Taxes 9.2% 9.4% 11.2% 9.3% 4.8% 10.3% Net Margin 27.6% 28.2% 33.4% 33.2% 31.8% 30.9% YEAR-TO-YEAR CHANGE Net Sales 6.3% 22.4% 25.3% 4.9% 13.3% 8.5% Cost of Goods Sold -2.1% 22.6% 10.5% 33.2% 41.5% 15.3% Gross Profit 8.4% 22.4% 29.5% -1.8% 6.7% 6.8% SG&A 11.8% 7.7% 6.0% 0.6% 4.5% -1.4% R&D and Engineering 0.4% 5.6% 6.3% 5.1% 2.2% -4.8% Operating Income 16.6% 48.7% 58.8% -4.1% 10.4% 17.8% Investment Income (Expense) 143.3% -39.4% -59.7% -10.3% 88.1% 88.3% EBITD 31.9% 45.4% 51.7% -4.3% 12.8% 18.9% Income Taxes 24.4% 37.3% 52.8% -16.1% -40.6% 18.9% Net Income 34.6% 48.4% 51.4% -0.4% 30.6% 18.9% SOURCE: TBR AND MICROSOFT26 1Q11 Microsoft Corp.| Software Business Quarterly ©2011 Technology Business Research, Inc.
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