Microsoft Flexes 4Q Cash Muscles

By Karen Rogers - July 25, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT, SNE | 0 Comments

• Email
• Print

I always liked Microsoft (NASDAQ: MSFT).  I prefer Windows over Mac, play Xbox games more than PlayStations, and will buy the Surface tablet instead of Apple’s (NASDAQ: AAPL)  iPad.  Despite a very challenging economy, Microsoft saw single digit growth in developed countries and double digit growth in developing countries.  This 4th quarter saw Microsoft blow away Wall Street expectations, coming in with a $0.73 EPS over the projected $0.62.  The company generated free cash flow of more than $5 billion this quarter and $22 billion in free cash flow for the year. Microsoft recently announced the release of several hardware and software products that could significantly add to its future free cash flows and help propel the stock price higher.

Gaming Systems and Skype.  Microsoft and Sony (NYSE: SNE) have fought a no-holds-barred battle for the hearts and minds of gamers for years.  Both Xbox 360 and PlayStation 3 have terrific games and features but, based on the numbers, first place goes to Microsoft.  Xbox has been the top selling game console in the U.S. for the past 18 months, and in this past quarter alone, shipped over 1.1 million consoles.  In contrast, Sony recently announced a record loss of $5.74 billion and that PlayStation would experience an 11% decline in sales this year.  Xbox market share increased this quarter from 42% to 47%, and the new Xbox version scheduled for release next year could push their market share to the 50% mark or higher.  In addition, Microsoft’s acquisition of Skype added another 20% of revenue this quarter.

Microsoft Office.  Okay, so this one’s a no-brainer.  MS Office remains Microsoft’s number one cash cow and product year after year. Although Google (NASDAQ: GOOG) Docs, Apple iWorks and Open Office try to compete, they’re simply not as good.  The new Office 15, among other updates, will feature cloud computing for its users. Google released an Android app allowing users to edit documents on their smartphones and tablets, but so far it hasn’t affected MS Office sales.  Microsoft already owns 94% of this market and, with the release of Office 15, should be able to further increase their market share.

Tablets.  In the first quarter 2012, Apple dominated the field with 65% of the tablet market.  Amazon’s (NASDAQ: AMZN) Kindle Fire trailed far behind at 6%, and Samsung’s Galaxy had about 5% of the market.  Rather than compete head on with Apple, Microsoft wisely targeted their exclusive audience:  business and professional MS Office users.  Surface will offer seamless MS Office integration for business and non-business uses on all their devices.  Amazon is releasing two new Kindle Fire tablets later this year, but neither one will tap into Microsoft’s MS Office clientele. With a current market share of approximately 1%, Surface should easily increase Microsoft’s tablet presence and revenue, and help take a large bite out of Apple’s substantial lead. 

Operating System. Microsoft’s Windows XP and 7 OS versions comprise 85% of the PC OS market followed by Apple’s Mac OS, 10.7 and 10.6 OS versions comprising 5.7% as of 1^st quarter 2012.  Microsoft’s fourth quarter 2012 revenue dropped to $4.1 billion compared to fourth quarter 2011 revenue of $4.7 billion due to the anticipation of Windows 8. Once the new version is released, Microsoft should see sales surge as customers purchase the updated product.    

With the one-time $6.2 billion write-off of aQuantive complete, Microsoft is poised to substantially increase both their market share and revenue in the upcoming quarters.  This 4Q earnings report demonstrated that Microsoft is one company capable of generating great profits in the face of dire market conditions.    

• Email
• Print
• Feedback