Cash Cow Microsoft Shows Further Resiliency

| About: Microsoft Corporation (MSFT)

It looks like the second quarter of Fiscal Year 2014 was another successful quarter for Microsoft (NASDAQ:MSFT). Despite the weaknesses we are seeing in the PC market, the company continues to show resiliency and a lot of strength. According to the latest announcement of the company, Microsoft generated $24.52 billion in revenues and $0.78 per share in net income in the last quarter, which indicates that the company's growth story is still intact.

Microsoft's revenue growth came at a rate of 14.3% compared to the same quarter a year ago. The company grew its gross profit from $15.76 billion to $16.24 billion, representing a growth rate of 3.04%. The company's operating profit came at $7.97 billion, up from last year's $7.77 billion by 2.57%. After taxes, the company earned 78 cents per share, up from 76 cents last year, representing a growth rate of 2.63%. Keep in mind that the company posted depreciation and amortization charges of $1.26 billion during the quarter, up from last year's $1.01 billion. Furthermore, accounts-receivable in the last quarter totaled $4.88 billion, up from $4.49 billion. Excluding these two items would add about $620 million to the growth between fiscal 2013's second quarter and fiscal 2014's second quarter.

During the quarter, Microsoft generated $4.41 billion from operations, down from $4.78 billion in the same quarter of last year. The company issued $8.26 billion in new debt, spent $2.11 billion on stock repurchases (up from $1.66 billion) and another $2.33 billion on dividends (up from $1.93 billion) during the last quarter.

Microsoft's Devices and Consumer Licensing segment reported revenue of $5.38 billion, up from last quarter's $4.34 billion (an increase of 23.97%) but down from last year's $5.70 billion (a drop of 5.59%). The business segment's gross profit was up from $3.93 billion to $4.98 billion from quarter-to-quarter, which represents a growth of 26.83%. Year-to-year, the segment's gross profit fell by 2.98%, down from $5.13 billion. The company sold 7.4 million Xbox units and 3.9 million of these units were Xbox One. Interestingly enough, Microsoft sold almost as many older generation units (3.5 million) as it sold its newest generation console. This proves that gaming consoles can remain popular for many years once they are released. Of course, many people were taking advantage of the price drops that occurred in the older Xbox devices when the new one came out. Microsoft also had a successful quarter for its tablet, Surface, as the sales of this device doubled from quarter-to-quarter, which is to be expected since last quarter was the holiday season when most consumer electronics are sold.

The company's Devices and Consumer Hardware segment saw a revenue increase of 68.41% from last year and an increase of 218.45% from last quarter at $4.73 billion (vs. last year's $2.81 billion and last quarter's $1.49 billion). Year-to-year, the gross profit was down from $762 million to $411 million, representing a drop of 46.06%; however, it was up 99.51% compared to the last quarter ($206 million).

Devices and Consumer Other segment saw a revenue increase of 9.66% from last quarter, but it also saw a revenue decline of 10.31% from last year. This segment reported a gross profit of $431 million against last quarter's $352 million and last year's $886 million.

The largest segment of Microsoft, Commercial Licensing, grew its revenues by 7.43% on year-to-year basis and 13.49% on quarter-to-quarter basis ($10.89 billion vs. last quarter's $9.59 billion and last year's $10.14 billion). This is also the most profitable segment of Microsoft where gross profits pass 90%. Microsoft generated $10.08 billion in gross profits, up 14% from last quarter and up 8% from last year.

The company's Commercial Other segment grew its revenues by 11.04% since last quarter and 28.15% since last year, as it grew its gross income by 50.91% since last quarter and 92.13% since last year due to margin expansion.

In the commercial segments, Microsoft's biggest gainers were SQL Server, cloud services, Office 365, Azure and CRM Dynamics, as all of these products and services saw their revenues grow by 100% or more. The company also posted $19 billion in unearned revenues and $23 billion in contracted but not billed items. These numbers will be mostly recognized in the future quarters.

Earlier in the day, Microsoft's management probably was not happy to hear Nokia's (NYSE:NOK) results because the company reported a drop in mobile phone and smart phone revenues, where a drop was visible both in volume and average sale price. After growing in double-digits for a few quarters in a row, Lumia's growth might be actually coming to a halt. Nokia didn't even announce the number of Lumias sold during the quarter. It's surprising that the company saw its phone volume decline during the fourth quarter when sales of consumer electronics peak. I am sure Microsoft has some ideas about how to increase Lumia sales in the near future, but we have no way of knowing how well those ideas will actually work out.

All in all, Microsoft had a strong quarter even though growth rate seems to have slowed down in some areas. The company showed a lot of resiliency in the last few quarters even though the PC market has been very weak. Microsoft is one of the biggest cash cows in the world and the company still has a single-digit P/E if we exclude the company's cash. Those who are looking for a conservative investment can get in Microsoft around this time.

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.