Shares of Microsoft (MSFT) fell around 2% in after hours trading on Thursday. The software company, best known from its Windows operating system, reported its first quarter results after the close.
First Quarter Results
Microsoft generated first quarter revenues for its fiscal 2013 of $16.0 billion, down 8% on the year. Non-GAAP revenues adjusted for the Windows Upgrade Offer, pre-sales of Windows 8, and the Office offer came in unchanged at $17.4 billion. Reported revenues came in slightly below analysts consensus of $16.42 billion.
The company reported operating income of $5.53 billion. Microsoft reported a net income of $4.47 billion, or $0.53 per share. Non-GAAP earnings per share, adjusted for the items above, came in at $0.65 per share. GAAP net income missed analysts consensus of $0.56 per share.
CEO Steve Ballmer commented on the results, "The launch of Windows 8 is the beginning of a new era at Microsoft. Investments we've made over a number of years are now coming together to create a future of exceptional devices and services, with tremendous opportunity for our customers, developers and partners."
Segmental Information
The Server & Tools business reported an 8% increase in revenues to $4.55 billion. Growth for the division was driven by a double-digit growth in SQL Server and growth in the System Center business.
The Business Division reported a 2% decline in revenues to $5.50 billion. Non-GAAP revenues rose 1%, adjusted for the impact of the Office Offer. The slowdown in PC demand ahead of the Windows 8 launch resulted in a decline in operating income.
The Windows & Windows Live Division reported a 33% decline in revenues to $3.24 billion. Revenues fell ahead of the release of Windows 8 and Windows RT. Non-GAAP revenues fell 9% for the division.
Online Services Division revenues rose 9% to $697 million, driven by a 15% increase in online advertising revenues.
Entertainment and Devices revenues fell 1% to $1.95 billion. The Xbox remains the best selling console in the US, holding a 49% market share. Skype continues its rapid growth, having 280 million users.
Valuation
Microsoft ended its first quarter of its fiscal 2013, with $66.6 billion in cash, equivalents and short term investments. The company operates with $11.9 billion in short and long term debt, for a net cash position of $54.7 billion.
For its fiscal 2012, Microsoft generated revenues of $73.7 billion. The company reported a net profit of $17.0 billion, or $2.00 per diluted share. A successful launch of Windows 8, could boost the results for its fiscal 2013.
Factoring in a 2% fall in after hours trading, shares are currently valued at $244 billion. This values the operating assets at roughly $190 billion. As such, operating assets are valued at 2.6 times annual revenues and 11 times annual earnings.
Currently, Microsoft pays a quarterly dividend of $0.23 per share, for an annual dividend yield of 3.1%.
Investment Thesis
Year to date, shares of Microsoft have risen some 12%. Shares started at $25 in January and quickly rose to $33 by March of the year. Since the summer of this year shares traded around the $30 mark, currently exchanging hands at $29 in after hours trading.
Over the past five years, Microsoft shares are trading unchanged. Shares traded as low as $15 in the beginning of 2009 and quickly rose back to $30, a level often seen over the past decade. Between 2009 and 2012, Microsoft increased annual revenues from $58.4 billion to $73.7 billion. Net income rose from $14.6 billion in 2009 to $17.0 billion in 2012. Microsoft retired roughly 5% of its shares outstanding over the past years and boosted its annual dividend payout from $0.52 per share to $0.92 at the moment.
Microsoft reported a weak set of first quarter results, disappointing on both revenues and earnings metrics. Investors are slightly relieved after investors had fears about the popularity of Windows 8. Earlier this week, Intel warned about sluggish PC sales ahead of the launch of the new operating system next week. Due to the Windows Upgrade Offer, revenues were impacted by $1.36 billion, and earnings by $0.13 per share.
Microsoft remains a strong cash cow, and that is exactly its problem in eyes of investors. The company's net cash balances have swollen to almost $55 billion by now. Investors are afraid that the company might use the cash position of $6.50 per share to make expensive acquisitions. Consequently, investors are discounting the company's cash positions. In 2012, Microsoft bough Yammer for $1.2 billion and last year it bought Skype for $8.5 billion. The company was forced to take a $6.2 billion write down in the fourth quarter of its fiscal 2012, after acquiring aQuantive in 2007.
While the risk of expensive acquisitions remains a possibility, the valuation remains appealing. Shares trade at just 11 times 2012s annual operating earnings, and the company recently raised its dividend, providing investors with a 3.1% yield per annum. With management remaining confident about Windows 8, the core of the business remains strong enough, for a long term value investor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
