TBR 4Q10 Microsoft Initial Response

TBR 4Q10 Microsoft Initial Response



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 ...

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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TBR 4Q10 Microsoft Initial Response TBR 4Q10 Microsoft Initial Response Presentation Transcript

  • SOFTWARE BUSINESS QUARTERLYSM4Q10 INITIAL RESPONSEMicrosoft Corp.Fourth Calendar Quarter 2010Second Fiscal Quarter 2011 Ended December 31, 2010Publish Date: January 28, 2011Author: Jillian Mirandi (jillian.mirandi@tbri.com), Research AnalystContent Editor: Stuart Williams, SBQ Practice Manager 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 .
  • Executive Summary TBRMicrosoft tightens its grip on desktop software as it looks tocloud for growthTBR Position: MSFT 4Q10 PERFORMANCE VS. EXPECTATIONSMicrosoft’s Business, Windows and Entertainment (in $ Millions) Consensus Guidance Range Actualdivisions spur growth in 4Q10. Revenue $ 15,650 N/A $ 19,953 • The desktop software market is Microsoft’s to lose, Operating Income N/A N/A $ 4,085 and the company tightened its grip on these critical Non- GAAP EPS $ 0.68 N/A $ 0.77 markets in 4Q10. Microsoft’s Windows and Windows Live divisions maintained pace with the MSFT 1Q11 GUIDANCE AND EXPECTATIONS overall PC shipment growth during the quarter, (in $ Millions) TBR Estimate Consensus Guidance Range even as the threats of netbooks, tablets and mobile devices lurk in the shadows. Revenue $ 16,400 $ 16,040 N/A • In the Microsoft Business Division, home to the Operating Income $ 6,154 N/A N/A Office franchise, revenue increased 24% year-to- Non-GAAP EPS N/A $ 0.55 N/A year, as Microsoft benefited both from the fortification of core Office sales and through growth Microsoft Corporate Strategies of new offerings such as Lync. • Drive adoption of cloud services with Azure, Office • Even as cloud becomes increasingly pronounced in Web Applications and Office 365 to offset margin Microsoft’s messaging to customers, the company pressure with volume. is not taking its foot off the accelerator of core • Maintain dominance of Windows and productivity Windows and Office products, maintaining a long- software products to drive strong cash flow. held presence that drives large streams of revenue • Expand presence in enterprise software (middleware and profit. and applications) to capture high-margin revenue growth. • Leverage Xbox and entertainment offerings to position Microsoft at the core of the digital home.2 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Executive Summary TBRMicrosoft expands deployment options and partnerships to growrevenue in new marketsKey Developments • The lines between hardware and software are obscured, with the customer value proposition focusing more on delivering a solution versus IT hardware and software, spurring Microsoft to broaden its deployment models with both cloud and appliance delivery.Microsoft is moving • Microsoft’s move into the appliance space broadens the IT arenas in which it competes, and placessoftware closer to the company in competition with vendors like IBM, Oracle, HP, Symantec and EMC.hardware • In 2010, Microsoft entered the appliance market when it introduced Azure platform appliance, a turnkey cloud platform enabling customers to deploy in their own datacenters. Microsoft extended its appliance strategy in 4Q10, announcing a partnership with HP to deliver the HP Database Consolidation Appliance. • Following the early warm reception of Office 365, as illustrated by the oversubscribed beta,Microsoft launches Microsoft recently announced that Microsoft Dynamics CRM Online, its cloud-based CRM offering,cloud-based CRM to will launch globally in 40 countries.increase the • Dynamics CRM Online has been available in the U.S. since 2008, but with Salesforce.com generatingpressure on 30% of its revenue abroad, and Oracle tapping into the global CRM market as well, Microsoft neededSalesforce.com andOracle’s CRM to open the solution up geographically. Microsoft has a large, established, international market it plans on further monetizing through its growing number of cloud solutions. • In 4Q10, Microsoft increased training, resources and support, helping partners increase success inMicrosoft’s the market. The fourth quarter saw new features for cloud partners, including Microsoft’s Goldrevamped Partner Competency award for the highest-skilled partners addressing the most specific customer needs.Network is crucial • Key to future growth, Microsoft updated its partner network to further address the cloud.to revenue growth Microsoft’s partner network grants partners early access to new cloud technologies, deepening the bond between vendor, partner and customer.3 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Executive Summary TBROffice 2010, Microsoft’s Business division and Kinect drove revenuegrowth across segments as Microsoft focuses on diversifying revenueQuarterly Segment Performance 4Q10 Growth Division Key Changes & Drivers Revenue YTY Trends to Monitor • Continued strong Windows 7 demand and accelerated adoption of Windows 7 by enterprises drove the segment’s 4Q10 growth. Microsoft expects the PC refresh Windows & $5,054 cycle to continue throughout • The significant decrease is due to the –26.8%* Windows Live million FY11, contributing to increases impact of Windows 7 launch and presales. throughout the year. • Windows shipments kept up with the PC shipments and are shipped on 20% of PCs worldwide. Server & Tools revenue showed strong We expect Server & Tools to growth compared to 4Q09, as Windows $4,390 grow year-to-year in 1Q11 asServer & Tools Azure adoption has risen rapidly in 4Q10 as 14.2% both existing and new customers million more customers adopt cloud solutions. migrate to the cloud. Bing now powers Yahoo’s algorithmic and paid search The Online Services segment revenue results in the U.S and Canada.Online Services increased year-to-year in 4Q10, but its $691 3.5% Facebook results are also Group operating profit remains a problem area, at million integrated into search results. –$543 million. This deal with Yahoo could produce an uptick in growth and revenue in 1Q11.*Negative year-to-year growth impacted by Windows 7 presales and launch4 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Executive Summary TBROffice 2010, Azure and Kinect drove revenue growth across segments asMicrosoft focuses on diversifying revenue (Cont.) Quarterly Segment Performance 4Q10 Growth Division Key Changes & Drivers Revenue YTY Trends to Monitor • Microsoft Office (comprised of Office, SharePoint, Exchange and Lync) generated 90% of MBD’s revenue, while Dynamics TBR expects Microsoft Business generated about 10% of revenue. Division to continue increasing Microsoft • Revenue increase primarily reflected $6,033 in 1Q11 as the adoption of Business million 27.1% Office 10, Office 365 and licensing of the 2010 Microsoft Office Division system to transactional business Dynamics Online expands customers, growth in multi-year volume globally. licensing revenue and an increase in Dynamics. TBR anticipates Microsoft’s Entertainment & Devices reported the entertainment and devices will Entertainment highest segmental growth. Kinect performed $3,698 27.4% significantly increase again & Devices better than expected and drove the million year-to-year in 4Q10, as Kinect purchases of various Xbox products. is incorporated to the growing Windows Phone 7.5 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Financial Model Strategy TBRKinect sales drove revenue growth, but at a higher price Revenues • Revenue growth was weighted toward the Microsoft TBR MICROSOFTS PROFITABILITY AND GROWTH Business division, increasing significantly by 27.1%, 50% 50% Revenue Growth Year-to-Year and Entertainment & Devices division, increasing by 40% 40% 27.4%. 30% 30% Margin • Kinect ramped Xbox sales, selling 8 million standalone 20% 20% and bundled sensors in 60 days over the holiday 10% 10% season. 0% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est. Expenses Operating Margin Net Margin Revenue Growth Year-to-Year SOURCE: TBR AND MICROSOFT • Cost of sales increased from 19.1% of total revenue to 24.2% of total revenue, reflecting higher Entertainment & Devices sales, which historically have lower margins than software. TBR MICROSOFT OPERATING METRICS • S&M expenses increased 5.7% year-to-year and R&D $35,000 rose similarly 5.1% year-to-year. $30,000 Gross Income • G&A expenses significantly decreased 15.9% year-to- $25,000 In $ millions $15,394 $15,120 SG&A year to $945 million in 4Q10 as Microsoft continues $20,000 $15,000 to trim overhead costs. $10,000 $4,743 $4,770 R&D $2,079 $2,185 $5,000 $8,513 $8,165 Operating Income Margins $0 • Gross profit rose 33.2% in 4Q10, but gross margin 4Q09 4Q10 Calendar Quarter decreased year-to-year from 80.9% to 75.8%. SOURCE: TBR AND MICROSOFT6 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Go-to-Market & Product Strategies TBR Beyond Kinect, intelligent video could be broadly used across the Microsoft portfolio• TBR believes Microsoft plans to use its 3-D sensing technology to add a unified communication platform in its Office division, similar to Citrix’s HD Faces, built into collaboration platform GoToMeeting, and Cisco’s WebEx. Microsoft Office is missing this key feature, leaving revenue on the table for companies like Citrix, Cisco and now Salesforce.com as it integrated recently acquired DimDim technology into its platform.• Microsoft’s acquisition of Canesta offers the company a patented “electronic perception technology.” This technology is a 3-D image sensor chip that, combined with Canesta’s software and a camera, allows users to control computers and devices through hand and body movements.• Microsoft’s Xbox Kinect already uses 3-D sensing technology, allowing users to play control-free. However, when Kinect was made, Microsoft chose Canesta’s competitor PrimeSense to provide the technology, as it was cheaper to implement. TBR believes Microsoft wanted to test the market and get its R&D prepared for integration of more sensing technology.• In addition to Canesta, Microsoft acquired 3DV systems in 2009, a company that has a similar 3-D movement technology. By acquiring two companies with 3-D gesture recognition technology, Microsoft gains a competitive advantage by shrinking the space for competitors to move in and acquire similar technology. Software Services Product Strategies Stack Offerings Services Strategies • Gear product functionality and capabilities • Enable and facilitate partner delivery of toward SMB customers, delivering ease of services and solution customization to end use versus enterprise-level functionality. BI customers. Consult • Counter open-source threats with selective • Participate and cooperate in partner participation and risk mitigation. Apps engagements as a product expert. • Expand target markets by investing in Premium • Increase annuity service agreements to consumer and enterprise products. provide revenue stability. MW • Leverage desktop strength in transition to Base • Deliver services directly to large end-users SaaS. that require a direct relationship with DB Support Microsoft. • Provide well-received platforms to support partner customization and development. • Deliver the education and training needed OS to promote and foster the Microsoft Education ecosystem. 7 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Go-to-Market & Product Strategies TBRMicrosoft combines security and management infrastructures to createForefront Endpoint 2010 • Traditionally, many companies had a separate endpoint security and management systems. Both aspects are very important, but deploying two systems requires the company to have two of everything (e.g., two maintenance policies), increasing overall costs. • To address this issue, Microsoft released Forefront Endpoint 2010, a new solution that combines security and management infrastructures into one solution. • The new solution provides better protection for companies because it gives managers a consolidated viewpoint of the health and protection of all user systems, and allows them to fix possible weaknesses on one console. With a new antivirus engine, it also increases security through better threat recognition. • In addition, the solution reduces the overall cost to customers, as it eliminates the need to have separate versions of policies for security and management. Indirect Sales Strategies Estimated Microsoft Revenue Direct Sales Strategies • Leverage partners to provide sales Mix by LOB • Target largest accounts directly coverage across a large global base; to meet customer needs for minimize investments in internal 10% continuity and deep global LE sales. 25% relationships. • Support partners with marketing • Partner with VARs and SIs to resources, development funds and SME maintain channel involvement, training/certification. 35% even for direct named • Implement tiered rebate programs to accounts. target specific markets or products. SMB • Overcome customer • Cooperate with partners on joint apprehension regarding SaaS by sales engagements. 30% offering Microsoft-hosted • Share support sales and delivery Consumer solutions. opportunities as a differentiator.8 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Resource Management Strategy TBRMicrosoft loses executives to competing cloud and mobile solutionsproviders Puget Sound International Strategy Headcount Headcount • Expand headcount outside its U.S. headquarters to 40,371 34,679 decrease development expenses and harness overseas talent. Other U.S. • Use brand and familiarity to sell new solutions such as Headcount cloud. 53,735 • Leverage cash to fund smaller-scale, tuck-in acquisitions. • Infuse management with outside talent to facilitate Microsoft’s expansion beyond traditional markets. • Fund datacenter buildout to support Online Services Executive Changes offerings. • Matt Miszewski, general manager of Microsoft’s government business, has recently moved to cloudInvestments competitor Salesforce.com.• Microsoft acquired Canesta in 4Q10 for the company’s patented • Johnny Chung Lee, an executive in the Kinect group, is 3-D image sensor chip technology. leaving Microsoft to join cloud competitor Google.• Microsoft continues to invest in the cloud, adding to its portfolio • Senior Director of Corporate Strategy and Acquisitions and expanding its solutions globally. Fritz Lanman left Microsoft in 4Q10 to found his own• The Online Services business, which generated operating losses of mobile start-up. $2.5 billion, remains an area of long-term investment for • Head of Microsoft’s Server & Tools Business, Bob Microsoft. Muglia, will be leaving the company this summer. CEO• Microsoft continues building datacenters across the U.S., most Steve Ballmer stated that Microsoft was looking for a recently starting development in Iowa, Washington and Virginia. change in this segment, and a new head would be put• Microsoft is in discussions to invest $2.5 billion in Indonesia to in place. Muglia recently announced he will be joining develop cloud computing systems in the region. Juniper Networks.9 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Income Statement TBR MICROSOFT CORP. Consolidated Statement of Income TBR (i n $ Thous a nds Except per Sha re Da ta ) CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est. FISCAL QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est. Net Sales $ 19,022,000 $ 14,503,000 $ 16,039,000 $ 16,195,000 $ 19,953,000 $ 16,400,000 Cost of Sales $ 3,628,000 $ 2,755,000 $ 3,170,000 $ 3,139,000 $ 4,833,000 $ 3,444,000 Gross Profit 15,394,000 11,748,000 12,869,000 13,056,000 15,120,000 12,956,000 Sales and Marketing 3,619,000 3,203,000 3,602,000 2,806,000 3,825,000 3,608,000 General and Administrative 1,124,000 1,152,000 987,000 938,000 945,000 956,667 Research and Development 2,079,000 2,220,000 2,350,000 2,196,000 2,185,000 2,237,750 Operating Income 8,513,000 5,173,000 5,930,000 7,116,000 8,165,000 6,153,583 Investment Income 370,000 168,000 94,000 114,000 332,000 177,000 EBITD 8,883,000 5,341,000 6,024,000 7,230,000 8,497,000 6,330,583 Provision for Income Taxes 2,221,000 1,335,000 1,506,000 1,820,000 1,863,000 1,583,000 Net Income $ 6,662,000 $ 4,006,000 $ 4,518,000 $ 5,410,000 $ 6,634,000 $ 4,747,583 Net Income per Share $ 0.74 $ 0.45 $ 0.51 $ 0.62 $ 0.77 Diluted Shares Outstanding 8,951,000,000 8,876,000,000 8,821,000,000 8,695,000,000 8,570,000,000 AS A PERCENTAGE OF REVENUE Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 19.1% 19.0% 19.8% 19.4% 24.2% 21.0% Gross Margin 80.9% 81.0% 80.2% 80.6% 75.8% 79.0% SG&A 24.9% 30.0% 28.6% 23.1% 23.9% 27.8% R&D 10.9% 15.3% 14.7% 13.6% 11.0% 13.6% Operating Margin 44.8% 35.7% 37.0% 43.9% 40.9% 37.5% Investment Income (Expense) 1.9% 1.2% 0.6% 0.7% 1.7% 1.1% EBITD 46.7% 36.8% 37.6% 44.6% 42.6% 38.6% Income Taxes 11.7% 9.2% 9.4% 11.2% 9.3% 9.7% Net Margin 35.0% 27.6% 28.2% 33.4% 33.2% 28.9% YEAR-TO-YEAR CHANGE Net Sales 14.4% 6.3% 22.4% 25.3% 4.9% -13.8% Cost of Goods Sold -7.1% -2.1% 22.6% 10.5% 33.2% -5.1% Gross Profit 21.0% 8.4% 22.4% 29.5% -1.8% -15.8% SG&A 5.6% 11.8% 7.7% 6.0% 0.6% -3.8% R&D and Engineering -9.2% 0.4% 5.6% 6.3% 5.1% 7.6% Operating Income 43.3% 16.6% 48.7% 58.8% -4.1% -27.7% Investment Income (Expense) 222.9% 143.3% -39.4% -59.7% 0.0% -37.5% EBITD 57.6% 31.9% 45.4% 51.7% 0.0% 32.9% Income Taxes 51.7% 24.4% 37.3% 52.8% 0.0% 32.9% Net Income 59.6% 34.6% 48.4% 51.4% 0.0% 32.8% SOURCE: TBR AND MICROSOFT10 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
  • Balance Sheet TBR MICROSOFT CORP. Consolidated Balance Sheets (i n $ Thous a nds ) TBR CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 FISCAL QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 ASSETS Current Assets Cash & Cash Equivalents $ 9,422,000 $ 8,155,000 $ 5,505,000 $ 8,161,000 $ 4,023,000 Short-term Investments $ 26,677,000 $ 31,511,000 $ 31,283,000 $ 36,012,000 $ 37,299,000 Accounts Receivable - Net 11,196,000 9,137,000 13,014,000 9,646,000 12,874,000 Deferred Income Taxes 2,056,000 2,222,000 2,184,000 2,344,000 2,548,000 Inventory 589,000 501,000 740,000 1,242,000 861,000 Other 2,547,000 2,992,000 2,950,000 2,176,000 2,149,000 Total Current Assets 52,487,000 54,518,000 55,676,000 59,581,000 59,754,000 Property, Plant, Equip. (Net of Dep.) 7,402,000 7,372,000 7,630,000 7,771,000 7,799,000 Other, Net 22,207,000 23,020,000 22,807,000 24,188,000 24,188,000 Total Assets $ 82,096,000 $ 84,910,000 $ 86,113,000 $ 91,540,000 $ 91,741,000 LIABILITIES AND EQUITY Current Liabilities Accounts Payable $ 3,171,000 $ 3,279,000 $ 4,025,000 $ 3,654,000 $ 3,863,000 Short-Term Debt $ 2,249,000 $ 2,249,000 $ 1,000,000 $ 1,000,000 $ - Accrued Compensation 2,417,000 2,885,000 3,283,000 2,252,000 2,402,000 Income Taxes Payable 721,000 901,000 1,074,000 2,136,000 1,439,000 Short-term Unearned Revenues 11,361,000 11,171,000 13,652,000 12,767,000 12,063,000 Securities Lending Payable 2,911,000 2,794,000 182,000 909,000 1,355,000 Other 2,885,000 3,145,000 2,931,000 3,139,000 3,190,000 Total Current Liabilities 25,715,000 26,424,000 26,147,000 25,857,000 24,312,000 Long-term Unearned Revenues 1,167,000 1,089,000 4,939,000 1,152,000 1,354,000 Other 10,931,000 11,687,000 8,852,000 17,589,000 17,333,000 Total Liabilities 37,813,000 39,200,000 39,938,000 44,598,000 43,825,000 Stockholders Equity Common Stock & PIC 62,566,000 62,517,000 62,856,000 61,935,000 61,646,000 Retained Earnings (18,283,000) (16,807,000) (16,681,000) (14,993,000) (13,165,000) Total Stockholders Equity 44,283,000 45,710,000 46,175,000 46,942,000 48,481,000 Total Liabilities & Equity $ 82,096,000 $ 84,910,000 $ 86,113,000 $ 91,540,000 $ 92,306,000 FINANCIAL RATIOS Days Sales Outstanding 53.0 56.7 73.0 53.6 58.1 Fixed Asset Turnover 10.2 7.9 8.6 8.4 10.3 Days Cash Outstanding 170.8 246.2 206.4 245.5 186.4 Total Asset Turnover 0.93 0.69 0.75 0.73 0.87 Debt/Asset Ratio 0.46 0.46 0.46 0.49 0.48 Current Ratio 2.04 2.06 2.13 2.30 2.46 Return on Assets 21.6% 21.9% 22.7% 24.2% 23.6% Return on Equity 41.6% 41.6% 43.2% 45.9% 44.4% Average Annual Revenue Per Employee $ 647,058 $ 661,591 $ 705,269 $ 743,040 $ 753,134 Employee Count 90,701 90,001 88,596 88,500 88,550 SOURCE: TBR AND MICROSOFT11 Microsoft 4Q10 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc.
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