Microsoft Year End Notes

The actual 10K hasn’t been posted on the SEC site yet, so we can only look at the press release. The press release contained “unaudited” numbers, which means that Microsoft’s accounting firm hasn’t signed off on them yet. That said, they are probably fairly accurate. Putting out an inaccurate press release can attract SEC attention, in a bad way.

Consider these numbers for total earnings (in millions):
4thQ 2009
$13,099

4thQ 2008
$15,837

That’s a drop of $2,738,000,000.00, a lot of money in anyone’s book. Costs didn’t drop anywhere near as much:
4thQ 2009
$ 9,112

4thQ 2008
$10,158

That’s a drop of $1,046,000,000.00, again a lot of money in anyone’s books. But it means earnings by $1,692,000,000.00 more than costs, which means net income has dropped:
4thQ 2009
$ 3,045

4thQ 2008
$ 4,297

Curiously the dividend for FY 2009 was $0.52 per share, while the dividend for FY 2008 was $0.44 per share. It looks like Microsoft may have been trying to buy the share holder’s loyalty. If so, it failed. The price of Microsoft stock was $25.56 on Thursday. On Friday it opened at $23.66 and spent some time as low as $22.98, and ended the day at $23.50.

But there’s other numbers of importance. For instance Cash and Cash Equivalents:
4thQ 2009
$ 6,076

4thQ 2008
$10,339

Why did Cash and Cash Equivalents fall? Microsoft made a decent profit, it not as high as usual. Short-term investments were:
4thQ 2009
$25,371

4thQ 2008
$13,323

Total cash, cash equivalents, and short-term investments
4thQ 2009
$31,447

4thQ 2008
$23,662

This raises a question – with this much money available in cash, cash equivalents, and short term investments, why would Microsoft be making arrangements for a loan earlier this summer? Several sites have speculated that Microsoft is in really deep financial trouble. Quite frankly they aren’t. In an economy like this Microsoft’s report looks great. So why the loan? We don’t know. But there must be a reason.

Going further along we see Goodwill. Uhm, this is Microsoft. Who has any “Goodwill” towards the company? XBox360 players who’ve sufferer the Red Ring of Death? Windows Media buyers who got DRMed to death? Well, Microsoft does list it
4thQ 2009
$12,503

4thQ 2008
$12,108

And it shows a slight increase.

At this point the word “why” keeps coming up?

1) Why did Total assets climb nearly $5 billion?
2) How can Microsoft claim “Goodwill”?
3) Why did total Cash & Cash Equiv go up by $8 billion?
4) Why did Microsoft drop so many product lines – they had enough cash.
5) Why did they lay off over 5000 employees, again they had enough cash.

So OK. Profits are down. Earnings are down. This was expected. So why did the share price drop so fast and so far? Is someone playing with the stock? Probably not. Probably one or two of the large investors looked at the report, and decided that Microsoft just wasn’t worth the price, and started selling.

So how does this affect the Free Software Community? In small ways. Microsoft doesn’t have as much manuoeuvring room as they did. It’s not a huge difference, but it’s a difference. At the same time, the company has to be feeling a bit of desperation.

In operating systems they can’t compete with GNU/Linux on price or performance. They can’t compete with Apple on price or performance. They can’t compete with Solaris on price or performance. They can’t compete with BSD (any version) on price or performance.

In fact they can’t compete with any operating system, on any level. Except for pre-installs. They win hands down there. And you have to wonder why? An inferior product, taking the majority of the consumer, and a fair bit of the small business market. There has to be a reason. And we know the reason. It came out during the Iowa anti-trust case (and yes, I have a copy of the all of the files for Comes vs Microsoft).

In fact they can’t even compete on browsers, with pre-installs. Firefox, Opera, and Safari continue to gain market share. Apache owns the web server market, is more stable, and a lot harder to hack. Open Office is taking market share from Microsoft Office. Microsoft can’t buy market share in search.

Even taking all that into account, remember the hypothetical $5 million investment I talked about in Numbers – Microsoft Stock Prices Part 1? Curiously you could take the 223,313 shares and sell them for $5,247,855.50! So even after the Friday drop, Microsoft shares are worth more than they were on July 11th!

So yeah, Microsoft isn’t what it was. This is the first drop year over year in their history. What will be interesting will be seeing what the company’s fiscal performance will be in the first quarter. Will earnings continue to drop? Stay tuned.

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3 thoughts on “Microsoft Year End Notes

  1. Maybe you were joking and I was whooshed, but let me try to explain goodwill.First, accounting rule 0: assets = liability + equity. Next, accounting rule 1, in all transactions, the sum of the debiting entries = the sum of the credit entries.Imagine you buy someone's store. You will pay cash, and get some assets, such as inventory, and some liabilities, such as the store's lease. Typically the former owner will not sell unless they get more than the net value of the assets and liabilities. So there has to be something else that was "bought." And that is called Goodwill for the buyer. (The seller calls it profit which is why she sold and didn't just liquidate.) Cash out is a credit, asset increase is a debit, liability increase is a credit and so goodwill (assuming that the purchase price exceeded the net of the assets and liabilities) is a debit.(This trips up some people. Imagine you get paid for an invoice. You would credit the income account and, since it has to balance, debit the cash account. Thus, deposits are debits to cash and payments are credits to cash.)Goodwill sits on the books as an asset.While it's there to balance the books, it also represents a valuation on the reason you bought the store, i.e., it will bring income in the future.Unlike other assets, such as cash or furniture, it is an intangible and, so accounting rules require that goodwill for a purchase be retired within a certain period of time after the purchase was made.Since the rules mandate a reduction of that asset and its intangibility precludes reduction via increasing another asset, without getting into the reasons why, it means that equity, in the future, will be reduced, or profits which would have gone entirely to retained earnings will be split among retained earnings and the goodwill.In other words, it will represent a 5 to 10 year drag on equity increase. Since the equity is the pool from which dividends are issued, it limits, to some degree, future dividends unless the business shows great profitability.Hope this helps and believe you me, my initial understanding of goodwill, when I first encountered it years ago as the press release drafter in a publicly traded corporation, was a similar misunderstanding. Luckily, the CEO was a great guy who enjoyed being a teacher.

  2. It was an attempt at humor. The concept of Microsoft trying to claim "Goodwill", well that's pretty bizarre. Kind of like Al Capone trying to claim goodwill for his business!From an accounting standpoint though they have a legal right to claim it, and to list it. But they are a convicted monopolist, and are fighting to maintain their monopoly status against government agencies such as the EU Competition Bureau. And they wonder why nobody likes them.

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