Microsoft Form 10-Q: Q1 FY2009

Key insights

7 takeaways

01
Microsoft repurchased $6.5 billion of common stock during the first quarter of fiscal year 2009, a significant increase from the $2.9 billion repurchased in the same period of the prior year.
02
The Microsoft Business Division (MBD) saw a 16% increase in business revenue, driven by volume licensing and a 10% rise in Microsoft Dynamics billings, while consumer revenue grew 36% due to promotional pricing for the 2007 Microsoft Office system.
03
The company estimates the total cost to resolve ongoing legal class-action settlements will range between $1.7 billion and $1.9 billion, with approximately $900 million in liability remaining as of September 30, 2008.
04
Microsoft reported a $3.1 billion payment to the IRS during the quarter to settle audit examinations for the 2000–2003 tax years.
05
Operating expenses grew 6% due to higher data center costs, online content expenses, and consulting service growth, though these were partially offset by reduced Xbox 360 manufacturing costs.
06
Cash used for financing activities totaled $5.2 billion for the quarter, an increase of $2.1 billion year-over-year, largely attributed to intensified share buybacks.
07
The company transitioned to reporting foreign currency remeasurement gains and losses as 'other income (expense)' rather than 'sales and marketing expense,' resulting in a $179 million loss reported under the new classification for the quarter.

Summary

Microsoft’s financial performance for the first quarter of fiscal year 2009, ending September 30, 2008, reflects a period of robust growth in core software and server segments balanced against significant macroeconomic volatility and strategic capital allocation. The company maintained a strong financial position despite a $3.1 billion IRS tax settlement and $6.5 billion in common stock repurchases, which contributed to a decrease in cash and short-term investments to $20.7 billion. While the Server and Tools and Business divisions demonstrated strong revenue growth, the Entertainment and Devices Division experienced a decline, attributed to the prior-year launch of Halo 3 and price reductions for the Xbox 360 console.

Operational strategy during this period focused on long-term value creation through a new $40 billion share repurchase program authorized through 2013, following the completion of a previous $40 billion initiative. The company also expanded its financial flexibility by establishing a $2 billion commercial paper program. Risk management remained a priority, with the company utilizing a Value-at-Risk model to navigate market fluctuations in interest rates and foreign currencies. Notably, the firm reported no direct exposure to subprime mortgage-backed securities, though it faced $72 million in investment impairments due to broader credit and stock market instability.

Legal and regulatory challenges remained a significant factor, with $1.1 billion in accrued liabilities for contingent legal matters and potential exposure for an additional $2.3 billion in adverse outcomes. Ongoing antitrust and patent litigation, including disputes with Alcatel-Lucent, continued to influence the company’s risk profile. Looking forward, Microsoft anticipated sustained growth in its core software and services sectors while projecting flat or declining revenue for the Entertainment and Devices Division. The company continued to navigate intense competition from open-source and advertising-funded models, alongside the inherent risks of supply chain management and intellectual property disputes.