This "look-ahead" post discusses how I came up with an estimate for Microsoft's earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available on January 28, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before we get into the details, let's take a step back and start with background information about Microsoft.
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.
Shares of Microsoft now trade for about $222 each. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.
Microsoft recorded profits of $47 billion on revenue of $147 billion during the last year. In the quarter that ended on 30 September 2020, Microsoft earned $1.82 per share, which significantly beat the $1.54 Wall Street consensus forecast. See http://tinyurl.com/yxosq5h4 for Microsoft's most recent quarterly report.
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%.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Microsoft's management communicated their expectations for the December 2020 quarter last October. (It would have been nice if they had made this easier to find by including it in an 8-K.)
The guidance indicates that the company expects Revenue between $39.5 and $40.4 billion, Costs of Goods Sold between $13.75 and $13.85 billion, and other operating expense (i.e., Research and Development, plus Sales, General, and Administrative expenses) between $11.4 and $11.5 billion.
The following baseline Income Statement takes into consideration the information mentioned above and trends seen in the company's historical results. The bottom line is that estimated earnings are $12.35 billion ($1.62 per share).
#microsoft #msft #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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