Microsoft reported after the market closed on January 26, 2021 it earned $2.03 per diluted share in the quarter that ended on December 31, 2020, up 33 percent from earnings of $1.53 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).
This post compares the quarterly Income Statement published by Microsoft to the estimates I made in a previous “Look Ahead” post. My estimates were based on publicly available guidance provided by Microsoft's management to financial analysts, news reports, and trends in the company's historical results. Unless otherwise mentioned, all reported values mentioned below are GAAP figures.
First, a little background about the company: Microsoft develops and sells operating system and application software, software and cloud services, and hardware items, such as game consoles. Cloud computing has become a large and growing business for Microsoft, and the company competes with industry leader Amazon, Google, and others. 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.
Revenue in the December 2020 quarter totaled $43.1 billion, 17 percent more than last year's $36.9 billion. The Productivity and Business Processes business was responsible for 31 percent of overall revenue, and this unit's revenue grew by 12.9 percent compared to the year-earlier result. The Intelligent Cloud business contributed 34 percent of revenue, and this unit's revenue increased by 23.0 percent. The More Personal Computing unit supplied 35 percent of revenue, and this business's revenue rose by 14.5 percent.
I was expecting Microsoft to report revenue of $40.0 billion for the December 2020 quarter. The actual amount surpassed my estimate by $3076.0 million (7.7 percent).
The Cost of Revenue (also known as Cost of Goods Sold) was $14.2 billion in the latest quarter, which translates into a Gross Margin of 67.0 percent of revenue. Since it was higher than the 66.5 percent Gross Margin achieved in the year-earlier quarter, it signifies that Microsoft sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 65.4 percent in the December 2020 quarter, and Microsoft exceeded that prediction by 1.7 percent.
Microsoft spent $4.9 billion on Research and Development in the latest quarter, up from $4.6 billion one year ago. I had estimated that R&D expenses would be $5.0 billion. R&D was 11.4 percent of Revenue.
Sales, General, and Administrative expenses totaled $6.1 billion in the December 2020 quarter, up from $6.1 billion one year ago. SG&A expenses decreased from 16.4 percent to 14.1 percent of quarterly revenue, which shows Microsoft spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 16.1 percent of revenue, and Microsoft spent less than that percentage.
Operating Income was $17.9 billion in the quarter, up 28.8 percent from the year-earlier period. Operating Income exceeded my $14.7 billion estimate by $3.2 billion.
Interest and other non-operating items summed to a net income of $440 million. My estimate was $0.0 million.
The effective income tax rate fell by 1.6 percent to 15.7 percent, which had a positive effect on net income. I expected the tax rate to be 16.0 percent.
Net income in the quarter was $15.5 billion, $2.03 per share. The figures for the year-earlier quarter were $11.6 billion, $1.53/share. My EPS estimate was $1.62.
In summary, Microsoft's earnings were much better than I expected. The major factors that resulted in this achievement were: strong revenue growth, an improved Gross Margin, reduced R&D spending, lower SG&A/revenue ratio, and non-operating income.
The Cash Flow Statement for the quarter shows that Microsoft's operating activities generated $12.5 billion in cash during the last quarter, up 17.2 percent from $10.7 billion in the year-earlier period. The cash flow delta was, therefore, less robust the change in earnings. Notable uses for cash included $4.2 billion to pay dividends to shareholders, $415 million for corporate acquisitions,$6.5 billion to buy back the company's common shares, and $4.2 billion to acquire property, plant and capital equipment.
Free cash flow over the last 12 months totaled $50.5 billion, or $6.63 per share using the latest share count. At the current market price per share of $232.33, this translates into a modest Free Cash Flow Yield of 2.9 percent.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
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