Microsoft Continues To Be A Cash Cow That Keeps Growing

| About: Microsoft Corporation (MSFT)

For months, people kept beating Microsoft (NASDAQ:MSFT) down for a variety of reasons. Yet, the company continues to show strong results and resilience in a historically weak PC market. The last quarter was no exception to this rule as Microsoft announced another strong quarter.

Every year, people claim that Microsoft's growth is over, yet the company proves them wrong each and every time. Last quarter, the company was able to generate $18.5 billion in revenues and $5.2 billion in net income. These figures not only beat the analyst estimates of $17.8 billion for revenues and $4.5 billion in net income, but they also crash last year's figures. Compared to the same quarter a year ago, Microsoft's revenue is up 16% and its net income is up 17%. The $18.5 billion generated by the company in revenues signifies an all-time-high.

Microsoft continues to reinvent itself and turn from a software company into a software-hardware and services company. While the transition is far from complete, the progress made so far is quite impressive. At the moment, most companies with a business model that is dependent on the PC market is suffering badly (some examples include Intel, AMD, HP and Dell) whereas, Microsoft's well-diversified business model allows it to offset the weakness of the PC market in other products and services offered by the company.

In the quarter, Microsoft's gross margin was 72.40%, down from 73.96% in the same quarter of last year. While the company's gross margin was slightly down, it still represents a very healthy number. As the company switches its product mix from all-software to software-hardware mix, the margins will probably come down; however, the overall revenues should increase. Microsoft's operating margin in the last quarter was 34.18%, up from 33.16% in the same quarter of last year. Notice that even Microsoft's operating margin is larger than what most companies see in their gross margin. The company's net profit margin (after taxes) was 28.30%, up from 27.89% in the same period a year ago. This is why I call Microsoft a "cash cow" because it is one of the most profitable companies in the world both in raw numbers and margin figures. No matter how hard the economical environment is, Microsoft earns money as easy as printing it.

Microsoft also saw an improvement in its balance sheet. The company's total cash and short term investments now total $80.67 billion, up from $77.02 billion in the last quarter. Microsoft's long-term debt totals $12.63 billion, slightly up from $12.60 billion in the last quarter. Since the same time period last year, the company's share count is down by about 60 million as the company's buyback program offsets all of the stock-based-employee-payments and even reduces the count of available shares. Microsoft will use some of its cash mountain to purchase Nokia's (NYSE:NOK) mobile phone division in the next couple quarters in addition to loaning some money to the Finnish company. Luckily, Nokia's acquisition (only the mobile phone business) will be paid from Microsoft's cash reserves outside of the US, which should save the company from some large taxation.

Like I mentioned above, as Microsoft shifts from being a software company to a software-hardware company, its margins are likely to suffer. In the last quarter, some of the fastest growing segments of Microsoft were low margin segments; whereas, some of the weakest growth segments were the ones with high margins. For example, the Devices and Consumer Licensing segment (the segment that produces Windows operating system and related software), reported a fall in revenues from $4.67 billion to $4.34 billion and this is the highest-margin segment of Microsoft, with a gross margin of 90%. On the other hand, the company's Devices and Consumer Hardware (the segment that produces Xbox and will be producing Lumia phones next year), was able to grow its revenues from $1.08 billion to $1.49 billion and this segment's gross margin is only 14%. Moving forward, Microsoft will have to sacrifice its margins in order to grow its revenues. Commercial Licensing is one of Microsoft segment where the company saw healthy amount of growth in addition to strong margins. As this segment grew its revenues from $8.95 billion to $9.59 billion, its gross margin remained high at 91.7%. This is the segment of Microsoft that sells products and services to companies rather than consumers. Historically, this segment of Microsoft has always been exceptionally strong because it remained without much competition; whereas, the company's consumer related segments face strong competition from companies like Apple.

Moving forward, Microsoft expects its Devices and Consumer Licensing segment to generate $5.2 billion to $5.4 billion in the next quarter, mostly due to the strong expectations regarding the holiday season. In the Devices and Consumer Hardware segment, Microsoft expects to generate $3.8 billion to $4.1 billion in revenues, and the huge spike (30-40% year-to-year and 200% quarter to quarter) can be attributed to the launch of the new generation Xbox during the holiday season. In Commercial Licensing, Microsoft expects further growth where revenues will be pushed to double digits ($10.7 billion to $10.9 billion) for the first time ever. Microsoft's guidance also called for full-year operating expenses of $31.3 billion to $31.9 billion but it didn't specify revenue or earnings estimates for the full-year.

I will continue to be invested in Microsoft because the company knows how to make money. One of Warren Buffet's strategies when investing is to ask yourself whether a company would be nice to own if it wasn't trading in the stock market and you didn't hope to sell it for a higher price than what you bought for at a later time (just like owning your own business and profiting from its operations). Microsoft is one of these companies that fit the picture.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.