Microsoft Corporation (NASDAQ: MSFT) is a major technology company that develops, manufactures and sells software and hardware products. It is best known for its Windows operating system and Microsoft Office product suite, and is one of the world's largest companies, with an April 2016 market cap of $433 billion. The company's revenue and earnings have moved into a period of uncertain growth during fiscal 2016, with product mix, pricing pressure, currency headwinds and nonrecurring charges dragging on results. Analysts expect positive performance moving forward, though forecasts have been revised downward in recent periods.
Revenue and Earnings
Microsoft reported GAAP revenue of $23.8 billion over the three months ending in December 2015, bringing trailing 12-month sales to $88.1 billion. Revenue fell 10.1% for the quarter, and the trailing 12-month figure fell below the $93.6 billion achieved in the fiscal year ending in June 2015, though the drop was only 2% after adjusting for revenue deferrals. The adjusted decline was driven by falling personal computer sales and currency headwinds. The five-year average revenue growth rate for Microsoft was 8.4% as of June 2015, a healthy rate for such a large company.
Microsoft's reported operating income declined 22.5% to $6 billion for the quarter ending in December 2015, though the adjusted figure actually demonstrated 3% growth to $7.9 billion. Trailing 12-month operating profits slumped to $18.2 billion, lower than any full year since fiscal 2006. Over the year ending in December 2015, Microsoft incurred $31.7 billion in costs of goods sold, a figure surpassed only by fiscal 2015 among recent years. Research and development expenses fell slightly from the fiscal 2015 peak of $12 billion, while selling, general and administrative (SG&A) expenses of $19.4 billion marked the lowest value since fiscal 2012. The trailing 12 months also included $8.4 billion of special charges.
Microsoft reported generally accepted accounting principles (GAAP) net profit of $11.4 billion over the 12 months ending in December 2015, lower than any of the preceding 10 fiscal years. Net income was $12.2 billion for the fiscal year ending in June 2015, despite a $10 billion nonrecurring charge for impairment, integration and restructuring. Fiscal 2014 net profits were $22.1 billion, nearly double the figure reported over the trailing 12 months. The primary factors driving lower net income were nonrecurring charges and lower gross profit.
Margin Analysis
Over the 12 months ending in December 2015, Microsoft's gross profit margin was 64%, lower than any full-year value of the past decade. Gross margin had been as high as 80.8% in fiscal 2008, but the figure has trended downward due to sales, pricing pressure and currency fluctuations. The impact of deferred revenue played a role as well, reducing quarterly gross profit margin by eight percentage points.
Operating margin of 18.6% over the 12 months ending in December 2015 was exceptionally low on a historical basis, though the figure adjusted for nonrecurring costs was substantially higher at 28.4%. However, even this margin lags historical results, which ranged from 29.5 to 38.8% over the preceding 10 fiscal years. Gross margin has been the primary factor driving this trend, with SG&A falling substantially relative to sales, and R&D expenses remaining roughly stable as a percentage of sales.
Outlook
As of April 2016, analysts expect earnings per share (EPS) of $2.76 in fiscal 2016 and $3.06 in fiscal 2017, representing 4.9% and 10.9% growth, respectively. Analysts expect fiscal 2016 revenue to fall 1.1% to $92.5 billion, followed by 5.7% growth in fiscal 2017 to $97.8 billion. EPS for fiscal 2018 is forecast at approximately $3.50. EPS estimates for all three fiscal years have fallen more than 10% over the 12 months leading up to April 2016, as analysts adjust to factors such as shifting sales mix, new exchange rates and the strategic positioning of the Windows phone. For a company of Microsoft's size and diversity, results have been relatively unpredictable. The company's full-year EPS has surprised analysts by as much as 6.1% to the downside and 4.6% to the upside in recent years, so investors should note this tendency when assessing consensus estimates.
