Microsoft Analysis

Microsoft announced FY09 earnings and employee layoffs on 22nd January, 2009.

First let us take a look at Microsoft's earning per share and margins for the last ten years. Microsoft's earning per share increased from 0.71/share to 1.87/share in the last ten years. It is expected to stay the same this year as well.

Cashflow per share increased from 0.84/share to around 2.16/share in the same period. However, the interesting thing here is the margin before income taxes. The margins declined to 39.4 cents on the dollar in 2008 from 60.2 cents on the dollar in 1999.

The number of shares outstanding declined from 10.964 billion to 9.490 billion. The company bought back stock in the open market in the last year and has further declined the number of shares outstanding to 8.914 billion.

For the first six months of FY 2009, the cost of revenue went up by 8.64%. The cost of R&D increased by 22.86%. Sales and marketing expenditures went up by 9.88%. The total expenditures increased by 10.8% for the first six months of FY09 compared to FY08.

Let us look at the revenues and profitability of each of the divisions at Microsoft.

Windows Client had revenues of 8.2 billion and income of 6.2 billion. The windows client revenue declined on a year over year basis by about 500 million. The server and tools division revenue and income increased by about 600 million making up for the downward shift in windows client. The online services business revenue increased slightly but it also opened a huge loss of 900+ million. The entertainment and devices division (includes XBoX and Zune) had flat revenue and declining profits. The cost of corporate level activity increased year over year. Consolidated net income declined to 11.9 billion from 12.3 billion dollars year over year despite increase in revenue.

Microsoft also announced layoff of 1400 employees immediately with 3600 more to follow in the next year and half. Interestingly enough, MAC gained market share against windows by about 1% point in the Oct-Dec quarter. The increase in operational expenditures will keep the EPS near 2008 levels.

As an investment, the EBT margin for Microsoft declined in the most recent quarter to about 35% from about 38%. The increase in costs continues to be a factor. Unless the company takes some measures to cut down on its various spending initiatives, it is likely that the stock will continue to underperform the broader market.