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Last week, Microsoft Corporation (NASDAQ:MSFT) announced its 3rd-quarter results (fiscal year ending June 30 2012), and looking at these numbers, in my opinion, the company is doing good.

I started off by looking at the income statement accounts of 2011 and 2012 (shown below):

Figures in $Million:

3 months ending March 30th 2012

3 months ending March 30th 2011

Variation of the 3 month data ending March 30th 2012/2011

9 months ending March 30th 2012

9 months ending March 30th 2011

Variation of the 9 month data ending March 30th 2012/2011

Revenue

17,407

16,428

5.96%

55,664

52,576

5.87%

Operating expenses:

Cost of revenue

3,952

3,897

1.41%

13,367

11,869

12.62%

Research and development

2,517

2,269

10.93%

7,217

6,650

8.53%

Sales and marketing

3,414

3,393

0.62%

10,076

10,024

0.52%

General and administrative

1,150

1,160

-0.86%

3,433

3,043

12.82%

Total operating expenses

11,033

10,719

2.93%

34,093

31,586

7.94%

Operating income

6,374

5,709

11.65%

21,571

20,990

2.77%

Other income (expense)

-11

316

-103.48%

337

762

-55.77%

Income before income taxes

6,363

6,025

5.61%

21,908

21,752

0.72%

Provision for income taxes

1,255

793

58.26%

4,438

4,476

-0.85%

Net income

5,108

5,232

-2.37%

17,470

17,276

1.12%

Source: SEC Website Quarterly report on Form 10-Q

3 months ending March 31st 2011 - 2012 analysis

  • COGS (also referred to as cost of revenue) has increased about 1.41% mainly due to changes in their products and service offerings mix
  • Total operating expenses have gone up by 2.93% (the constituent expenses other than COGS contributed to about $7.1billion - an increase of 4% - attributed mainly to higher people costs. We see that R&D expenses have shot up about 10.93%)
  • Operating income increased 11.65% to $6.37 billion, and a net income of $5.1 billion (a drop of 2.37%)

Similar points have also been mentioned in their earnings call transcript.

These increases in expenses and the resulting decrease in net income should not be a major point of concern, simply because Microsoft is preparing for one of its biggest launch years ahead (windows 8, and many other exciting products).

9 months ending March 31st 2011 - 2012 analysis

  • COGS increased by 12.62% (can be attributed to the changes in the product and service offerings mix). R&D expenses are up by 8.53% (due to higher people costs).
  • Although S&M expenses have not increased significantly (up by 0.5% only), revenue has gone up by 5.87%. This is a clear indicator of improved margins, which is a very good thing for any business. In its earnings call it also pointed out that revenue received from enterprise software updates (MS server and MS office products), and continued business demand for PCs has been the main drivers for the revenue improvement.
  • G&A expenses have increased by 12.82%, and the operating expenses have gone up by 7.94%. But the overall net income has only risen by 1.12%. This could be one cause of concern for present and potential investors because the reasons that are pushing up these G&A costs have not been clearly communicated.

We can expect them to easily close fiscal 2012 with revenue of $68B to $70B, resulting in an estimated overall income of about $24B and contributing to an EPS value of $2.85$/share

In fiscal 2013, Microsoft has declared its plans to launch a series of high impact products:

  • Windows 8 and its availability on both Intel (X86) and ARM processors
  • Windows server 2012 (combined with SQL server and System center is highly liked by CIOs planning to move their IT infrastructure to cloud)
  • Office 15 (which is expected to help people work, collaborate and communicate in a faster, smarter and better way) will be the future revenue growth driver in the Office product segment
  • A series of ongoing innovations are also expected to show up on Xbox, Skype, Windows phone and Bing.

The company expects its fiscal 2013 operating expenses to be $30.3B to $30.9B. The introduction of the new products, services and innovative updates on its existing products and services will surely drive up the revenue by at least 10% - resulting in an estimated $78B in revenue with an operating income of $47B. Overall net income estimation for fiscal 2013 could be around $38.54B resulting in an EPS value of $4.6/share (assuming 8,401million shares outstanding).

The current Stock price, EPS values and PE multiples of Microsoft and some comparable companies are mentioned below:

Firm

Stock price

EPS

P/E multiple

Microsoft

32.05

2.75

11.66

Oracle (NYSE:ORCL)

29.32

1.9

15.44

Google (NASDAQ:GOOG)

614.06

32.99

18.61

Amazon (NASDAQ:AMZN)

225.48

1.22

185.18

DELL

16.45

1.88

8.75

Apple (NASDAQ:AAPL)

601.62

41.02

14.67

IBM

207.4

13.41

15.46

Among the comparable group of these selected technology companies, Microsoft offers one of the reasonably better combinations of EPS and PE multiple at its current price.

Conclusion
Based on the above mentioned information and analysis, Microsoft stock can be expected to bring in profits to its stockholders over the next few quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data, calculations and financial definitions, and may contain approximations and errors. Please check for the correctness of estimates, calculations and data before using them.

Source: Analysis Of Microsoft's 2012 (Q1-Q3) Financials

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