Microsoft
Q4
| Microsoft
Q4
|
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* Randy Befumo (MF Templar) MICROSOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> ALEXANDRIA, Va., July 22, 1996/FOOLWIRE/ --- Microsoft Corporation today announced revenues of $8.67 billion for the fiscal year ended June 30, 1996, a 46% increase over the $5.94 billion reported last year. Net income totaled $2.20 billion, and earnings per share were $3.43, representing a 48% increase compared to $2.32 in fiscal 1995.
Revenues for the quarter ended June 30, 1996 were $2.26 billion, a 39% increase over the comparable quarter in fiscal 1995. For the quarter, net income was $559 million, and earnings per share were $0.87, an increase of 50% compared to the $0.58 earned during the same quarter last year.
Excluding a $0.05 one-time charge in the fourth quarter of fiscal 1995 related to the termination of the proposed Intuit merger, earnings per share grew 45% in fiscal 1996, and 38% in the quarter compared to the same quarter last year.
Growth for this year exceeded the growth for fiscal 1995 as well as the compound annual growth rate over the past five years. Sales and marketing expenses were contained, general and administrative expenses decreased even more and cost of revenues was the most contained of all, dropping a full percentage point in the quarter mainly on a shift in the product mix. .
BREAKDOWN BY SEGMENT
The Platforms Group did $974 million, up 53% from last year and flat from the prior quarter. For the full year, platform revenues increased 74%. This was fueled by Windows95. In 1996, desktop operating systems saw strong growth fueled by strong PC shipments. They will announce the number of licenses on the first anniversary of Windows95 and Windows NT, so don't look for any updates before then.
Business Systems did well, with servers and server applications up 125% in the quarter. Licenses for servers were up by an even higher amount, growing 150% in the quarter. Microsoft's BackOffice bundle increased by up to 600% over the prior year. Exchange and Sequel Server 6.5 both shipped in quarter, driving revenues as well. Across the entire product line, revenues more than doubled.
For the Internet Platform and Tools Group, there was a lot of noise but not quite as much in the way of revenue growth. Microsoft did see endorsement of Active X by a number of developers. Early reviews of Internet Explorer 3.0 were very good and in the next quarter they will ship Internet Explorer 4.0, finally catching up with Netscape in the version numbers. The company said that Internet Explorer 5.0 was not far off either.
For the Applications & Content Group, Microsoft saw revenues increase by up 33% over the prior quarter. The total for the year was $4.56 billion, up 27%. For the quarter, desktop applications were up 20% and exceeded $1 billion in revenues for the second time in Microsoft's history. During the quarter Microsoft recognized revenue from coupons for upgrades distributed with 16 bit operating systems last year. During the quarter, there were 450,000 downloads of its of FrontPage 1.1 and the final version was released. WindowsNT server had Microsoft's FrontPage bundled with it. Content saw strong product introductions, with BookShelf '97, Magic School Bus and Slate all launched in the quarter. The Microsoft Network ended the quarter with 1.3 million subscribers at the end of the quarter. Publisher grew very well as well.
CHANNEL AND COUNTRY REVENUE MIX
Original Equipment Manufacturers (OEMs) "shot the moon" this year, due the "three-planet" alignment of personal computer (PC) demand, pricing and the introduction of 32 bit systems. Finished good revenues were $685 million in the U.S. and Canada, up more than 40%. Europe was 36% to $2.02 billion for the year. Revenues were down sequentially in the quarter in Europe. International sales were $450 million in the quarter, up 53%. Growth was particularly strong in Latin America, exceeding 75%. Japan, Italy, the Netherlands, Spain and Korea all had annual finished good revenues increases above 55%. Some of this was up because of the dollar, but for the year they were hedged against the dollar. Channel inventories seemed to be in place across the board.
COST STRUCTURE
COSTS OF REVENUES: Cost of revenues was down sequentially. For the entire year it was down 1.1% to 13.7%. This was due to changes in channel mix, increased licensing, increased CD-ROMs, manufacturing efficiencies and selective outsourcing.
RESEARCH AND DEVELOPMENT: Research and development (R&D) continued to grow significantly faster than revenues. R&D was $453 million the June quarter, up 73% from last year and 24% for last quarter. This was affected by charges for purchased R&D, but was still up. For the year, R&D was up 67%. Server products and interactive media got the most attention.
SALES AND MARKETING: Sales and marketing (S&M) costs were $661, was 29.3% of sales and up 31.1% since last quarter. Efficiencies were achieved in product support quarter over quarter, which kept S&M from growing as fast as revenues.. For the year it was 30.7%, compared to 31.9% last year. Growth in headcount was contained.
GENERAL AND ADMINISTRATION: General and administration (G&A) was $87 million, which was flat with last quarter and the year before.
INTEREST INCOME: Interest income increased 47% over last year and 7% sequentially. $320 million of interest income was earned for the whole year. Higher interest incomes were due to higher cash balances during the year.
BALANCE SHEET
TOTAL ASSETS: Total assets grew to $10.09 billion this quarter. Cash was up 46% to $6.9 billion and was about 69% of assets. Accounts receivable was down from the prior quarter due to collections and slight improvement of days sales outstanding. Due to a shift in the business, inventories are no longer significant and are included in other assets now.
Unearned revenues continue to increase. The unearned portion of unearned revenues from operating systems, maintenance and other subscription contracts was charged against redeemed coupons for upgrade. For the full year, they repurchased $1.4 billion in stock, or 13.9 million shares.
GOING FORWARD, GUIDANCE
The financial model is in great shape. Costs are growing slower than revenues, except for research and development. Earnings are growing faster than revenues, which is a pretty nice place to be. 1996 was about committing to and embracing the Internet. Microsoft billing patterns for major revenue engines are stronger than ever before. For some versions of their products, Microsoft is earning more after they sell the product. R&D continues to increase. R&D should increase to $2 billion and will be targeted on the Internet. About $200 million of this will be related to joint ventures like MSNBC. This will be an increase from this quarter's core R&D, which was about two-thirds of the total R&D spending.
Overall, chief financial officer (CFO) Mike Brown stressed caution, just like he does in every quarterly conference call. The company sees a slow summer quarter, with a "hockey stick" quarter in the December and strong, similar quarters in March and June. The company sees slower growth in 1997 than 1996. 1996 was the highest growth in a year since 1992. In 1996, OEMs benefited from PC fundamentals, pricing and penetration. OEM revenues rose 52%. Windows95 price improvements have already occurred. NT will probably be more financially exciting in 1998 than 1997. Server growth remains strong, but it is a high percentage off of a small base.
Beneath the product and market share success, the earnings picture evolves. Licensing and maintenance has been very popular. Maintenance revenues recognized have increased 8 times in eight quarters. When Windows95 was shipped, it required pro rata recognition. Unearned revenues went from $50 million at the beginning of the year to $560 million at the end of the year. When they ship Office97, they expect this will require pro rata recognition as well. They do not expect any of their current products will have to be recognized in a pro rata fashion. Much of the unearned revenues this year will be recognized next year, but they think the amount will go up as they feel the pro rata recognition in all of the applications they sell. They do not see how it could be twice as much, but it will be higher. Pro rata recognition of Office97 should occur in the second half of the year. A significant percentage of desktop application revenues in this quarter are still 16 bit. Desktop applications also have a shorter period in which to recognize earnings, about 12 to 18 months.
There was a nice improvement in the cost percentage this year. However, much of the benefit of the shift to CD-ROM and the smaller packaging have occurred. Microsoft is not sure whether or not their gross margins are going to improve beyond the 89% level. It depends on how quickly some aspects of their cost structure shift, like software shipped on CD-ROM and the like. Also, there is mix shift when a new product launches that causes a bit of a spike. They may see a little first and second quarter increase in costs of goods sold with the third and fourth quarter more like this quarter. Sales and marketing expenses became more variable during 1996. In 1997, they do expect some sales and marketing spending increases around the product launches. They will be surprised if sales and marketing grows less than reported revenues, even after subtracting a little more for Desktop97. They like to keep our general and administrative spending fairly low. Barring any unusual items, they would not be surprised to see this expense categroy grow less than reported revenues. Interest income will be a function of cash-balances and stock buybacks. They do not expect the tax rate to change. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
Copyright 1996,
The Motley Fool |