Microsoft reported (tinyurl.com/yxosq5h4) after the market closed on 27 October 2020 it earned $1.82 per diluted share in the quarter that ended on 30 September 2020, up 32% percent from earnings of $1.38 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
Microsoft develops and sells operating system and application software, software and cloud services, and hardware items, such as game consoles. Microsoft acquired LinkedIn in December 2016 for approximately $27 billion, and it acquired GitHub in October 2018 for $7.5 billion. In September 2020, Microsoft reached an agreement to acquire ZeniMax Media, the parent company of game-developer Bethesda Softworks, for $7.5 billion.
Earnings of $1.82 per share in the latest quarter significantly beat the $1.54 average ("consensus") of estimates made by Wall Street analysts. See tinyurl.com/y66ln98g for Microsoft's earnings record and forecasts.
Although Microsoft's earnings were better than expected, stock market traders still weren't satisfied. The price of the company's shares fell 1.8% during after-hours trading following the report.
Note that a change in the assumed useful life of Microsoft's servers and network equipment increased net income in the quarter by $927 million, or $0.10 per share.
Looking deeper into the GAAP results, "top-line" revenue in the September 2020 quarter totaled $37.2 billion, 12% more than last year's $33.1 billion. The Productivity and Business Processes business was responsible for 33% of overall revenue, and this unit's revenue grew by 11.2% compared to the year-earlier result. The Intelligent Cloud business contributed 35% of revenue, and this unit's revenue grew by 19.7%. The More Personal Computing unit supplied 32% of revenue, and the amount grew by 6.4%.
The gross margin strengthened from 68.5% of revenue to 70.4%, a sign that Microsoft sold its output and services at more profitable prices relative to production costs. Sales, general, and administrative expenses decreased from 16.3% to 14.4% of quarterly revenue, which shows the company spent less per dollar of sales on other operational costs, such as marketing. The effective income tax rate fell by 2.0% to 13.8%, which had a positive effect on net income.
Microsoft's operating activities generated $19.3 billion in cash during the last quarter, up 39.9% from $13.8 billion in the year-earlier period. The cash flow delta was, therefore, much better than the change in earnings. Notable uses for cash included $3.9 billion to pay dividends to shareholders, $481 million for corporate acquisitions, $6.7 billion to buy back the company's common shares, and $4.9 billion to acquire property, plant and capital equipment.
Free cash flow over the last 12 months totaled $49.3 billion, or $6.45 per share using the latest share count. At the current market price per share of $202.47, this translates into a modest Free Cash Flow Yield of 3.2%.
The accompanying charts illustrate several trends in Microsoft's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.
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