This is the second part of the overview of Microsoft for fiscal year 2009-2010 based in the content of the annual report for the period between 1 of July 2009 and 30 of June 2010. This annual report was published on 30 of July 2010.
The whole review is divided in three posts: Profile and Results, Financial Performance (this one) and External Factors and Future.
For this second part, I calculated the ratios using Microsoft 2010 numbers. You can read more about those ratios in the post “Financial Performance: Ratios“. The results can be found in table 1 below.
As I wrote before, the principal idea of these ratios is to compare performance among different companies. This is the first company in this section and here is nothing else to compare with yet, but as we continue reviewing different companies we will be able to map them all together in the different categories: Profitability, efficiency, liquidity and gearing.
Microsoft´s return ratios (1 to 4) show how efficient is the use of funds in returning wealth. Ratios 1 and 2 tell us that at the end of the day the business has generated 41% of the Equity, or 31% of the Equity plus the long therm liabilities (long term debt). Ratio 3 and 4 are lower because they do not include the “other” income generated this year. This income could be anything that is not part of the core business of Microsoft such as could be the sale of land or equipment. The former means that the core business is generating 40% of the total investment as wealth. If it continues like this, the investment could be doubled in 2.5 years.
Margins 5 to 7 analyse the revenues’ profitability instead of the investments’. Comparing these three we can see where the margin is being spent. After producing the goods or operating the services sold, Microsoft´s margin is 80% (ratio 5), however the margin drops to 39% (ratio 6) after paying all the salaries or expenses of administration functions such as marketing, HR, sales, etc. Microsoft loses 9% more in taxes and “others” (ratio 7 which is 30%). The three ratios’ proportion sounds reasonable if we think that Microsoft do not really produce many tangible products for which they would need raw materials or big factories, therefore there are fewer operating expenses (cost of goods sold) than in a business in which tangible products are produced. The big expenditure is made in the administrative expenses where most of the variable costs, such as wages, are taking 41% of the original margin (80% to 39%).
Ratios 8 and 9 tell us how efficient are investment and assets in generating revenues. Ratio 8 shows that Microsoft is selling 104% of the capital invested during this year. This is good and will be compared with future technology companies in the future to find out if it is a normal situation in the technology companies. Ratio 9 tells us that they are selling 73% of the value of total assets . The usage f the assets is 73% efficient which could be seen as relatively low. This is important because a lower ratio 9 normally means that the company has higher profit margins. Again we will compare these ratios with other technology companies in the future to see the how the industry behaves in this category.
The assets are everything that the company owns including buildings, computers, inventories, cash or any other possession. Ratios 10 and 11 tell us that Microsoft is capable to pay more than double of their short term liabilities with the assets they own, with or without selling the inventory they have in stock. These ratios are really close to each other because Microsoft does not have a high inventory, which is reasonable knowing that most of the products that they sell are software and services which do not need huge warehouses or items stock. If we talk about cash only, ratio 12 shows that they do not have enough cash to pay all the short term liabilities or debt, which could be dangerous. However, this shortage of cash may be justified by some cash investment just before the statements report, and ratios 10 and 11 support ratio 12 in this matter.
These ratios totally depend on the industry. The intention here is to continue analysing technology companies and compare the average of all the gearing ratios to each company’s in this graph. For now I can say that in general ratio 13 should be below 30%, which it is for Microsoft.
Other interesting facts
Revenues by Division for 2010:
- Windows and Windows Live: Revenue was $18,491 M (17,788), 23% increase versus 2009. Largely correlated to PC market performance (OEMs) which are 80% of the total division’s revenues and Windows 7 strong sales. Operating Income of $12,089 M
- Servers and Tools: Revenue was $14,866 M (14,878), 5% increase versus 2009. Approximately 50% of the division’s revenue come from annuity volume licensing agreements, 30% is purchased through transactional volume licensing programs, retail and licenses sold by OEMs. The reminder comes from Enterprise services. Operating Income of $4,990 M
- Online Service: Revenue was $2,199 M (2,198), 4% increase versus 2009. Reflecting the on line advertising revenue increase, but a decrease in internet access revenue (maybe because more broadband access or other price-competitive services). The agreement with Yahoo! In which Microsoft will provide the exclusive algorithm and paid search for Yahoo! web sites has some impact in this revenue because of the commitments and guarantees this agreement imply. Operating Income of -$2,436 M (loss)
- Microsoft Business: Revenue was $18,642 M (18,909), -1% versus 2009. Microsoft Office generate over 90% of this division revenue, and it decreased primarily because a net deferral of revenue related to eligible sales of the 2007 Microsoft Office system with a guarantee to be upgraded to the 2010 Microsoft Office system ant minimal or no cost. Operating Income of $11,664 M
- Entertainment and Devices: Revenue was $8,058 M (8,114), 0% increase/decrease versus 2009. This is the result of the combination of increased revenue for non-gaming portion of the business and the decreased revenues form Xbox 360 platform and PC games. Operating Income of -$2,798 M(loss)
- Cash, cash equivalents and short-term investments: $36.8 B
- Equity and other investments: $7.8 B
- Debt: $6 B, divided in $1 B in short term debt and $5 B in long term debt (the latter including $1.25 B of convertible debt)
- Contractual obligations: Microsoft will have to pay the following amounts during the following years: $4.918 B in 2011, $4,710 B between 2012-14, $650 B between 2015-17, $2,693 B in 2018 and after. These sum a total of $13,250 B.
- Share repurchase: From the last $40 B share repurchase programme announced on 22 of September 2008, only $23.7 B have been repurchased by the date this annual report was out. From those, only during 2010 fiscal year, $10.8 B were repurchased.
- Dividends: The quarterly dividends per share have been stable in the $0.13 per share during at least the last two years.
Even when all this ratios are more about the financial perspective of a company than about its pure strategy, it is extremely important to understand the financial situation of the players, but it is even more important to understand the general landscape of the industry. This perspective helps to understand the potential and risks related to the decisions that the technology companies make everyday, and this serve as base to define the implementation plan to follow the designed strategy.