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First off, investors expecting even a little transparency around the performance of Skype will be disappointed. Despite being managed internally as a separate division, Skype’s results will not be individually disclosed in MSFT’s financials. Most of Skype’s results were folded in to the Entertainment and Devices Division (“EDD”) and the goodwill from the purchase apportioned between EDD and Microsoft Business Division.
Overall Microsoft’s revenue rose 5% to $20.88 billion while operating income fell 2% to $7.99 billion. Results for the individual divisions were as follows.
| (In millions) | Three Months Ended December 31, | Six Months Ended December 31, | ||
| 2011 | 2010 | 2011 | 2010 | |
4,709
4,988
9,541
9,694
Server and Tools
4,775
4,291
9,026
8,154
Online Services Division
798
729
1,456
1,292
Microsoft Business Division
6,265
5,890
11,855
11,063
Entertainment and Devices Division
4,237
3,728
6,205
5,507
Unallocated and other
101
327
174
438
Consolidated
20,885
19,953
38,257
36,148
Operating Income (Loss)
6,360
Windows & Windows Live Division
2,825
3,148
6,044
3,271
Server and Tools
2,003
1,723
3,608
(1,121
Online Services Division
(455
(557
(968
7,321
Microsoft Business Division
4,137
3,865
7,811
1,088
Entertainment and Devices Division
530
706
888
(1,638
Reconciling amounts
(1,046
(720
(2,186
15,281
Consolidated
7,994
8,165
15,197
(Source: MSFT 10-Q)
Most significant is that the eternal money pit known as Online Services is starting to improve. Operating margins are now -57%, up from -75% for the same quarter last year and up from the regular -100% margins in years before. The main drivers in the improved performance were increased Bing search share (something MSFT can control) and higher advertising rates (outside of MSFT control).
There continues to be mixed news about how the HDD shortage affected the PC industry. Microsoft explicitly blamed the shortage for the decline in revenue along with some other factors. However, in the Intel conference call management stated that they believed the impact of the HDD shortage on end sales to consumers and businesses was negligible and that anyone who wanted to buy a PC could get one. We tend to side with Intel’s view on this and believe that the tablet market (humorously referred to by Microsoft as “competing form factors”) is indeed putting a dent in PC sales. Also, the depressed economy in the Eurozone certainly isn’t helping sales either.
Microsoft’s core businesses continue to do well with strength in Servers & Tools and Entertainment and Devices Division (“EDD”) offsetting declines in the Windows franchise. We believe PC sales will continue to be soft and the dynamic that we are seeing this quarter will continue.
EDD continues to be a bright spot with continuing strong sales of Xbox, Xbox LIVE subscriptions, Kinect, and the rollout of Nokia handsets running Windows. Revenue was up sharply but operating income fell as expenses related to Skype and increased royalty payments weighed on the bottom line results.
Microsoft provided the following slide summarizing their outlook for the rest of 2012.
(Source: MSFT quarterly presentation)
Microsoft’s stock continues to suffer from the “Ballmer discount” and despite a solid business the stock continues to meander between $25 and $30. We will continue to hold MSFT in the Buffett-Munger portfolio as we believe the attractiveness of MSFT’s business outweighs the poor quality of management at the executive level.
Disclosure: Long MSFT, INTC
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why a younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
About the author:
Ben Strubel
President and Portfolio Manager of Strubel Investment Management, LLC a value oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, PA.
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I saw the following quote today... and it reminded me of Jeremy Grantham's discussion of Graham and Dodd vs "animal instincts":
"what we have is less exciting, less innovative and less revolutionary because good ideas are strangled in the bed.”
a bit more context (it's an interesting article):
"Think of it like this: Look back at your high school yearbook and find the kid who was voted “most likely to succeed.” Now imagine he’s the only one who got any money to go to college, buy a house or pursue his dreams. The rest of your class? You’re on your own, or maybe stuck in high school forever, never given the opportunity to show off your potential....
“Imagine, you have something which is potentially more promising, but usually more risky, and you have an investor who has put his hard-earned money into supporting projects and he knows that if he has a drug, he will make money hand-over-fist. At the end, if you have a drug, you’re going to be successful, whether it’s a super-great drug or just a drug,” he says. “It’s not just that we don’t have enough drugs - what we have is less exciting, less innovative and less revolutionary because good ideas are strangled in the bed.”
Source:
Medical break-throughs strangled by funding realities
Business First by Tracey Drury, Buffalo Business First Reporter
Date: Thursday, January 19, 2012
http://www.bizjournals.com/buffalo/blog/health_matters/2012/01/medical-break-throughs-strangled-by.html