Microsoft's Black Sheep Don't Matter Much: Fool by Numbers

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On Jan. 24, software titan Microsoft (Nasdaq: MSFT) released second-quarter 2008 earnings for the period ending Dec. 31, 2007.

• The laggards in Microsoft's portfolio are the usual suspects: the entertainment and devices division grew sales at a tepid 3% compared to the year-ago quarter, and the online services segment doubled its loss from operations to $245 million.
• There is a silver lining for each underperformer, though. The online business reported 38% higher sales, and entertainment products like the Xbox 360 actually made a $357 million profit this time.
• All of that sort of drowns in the flood of cash that flows out of the Redmond machine, though. A 92% year-over-year EPS increase is no mean feat for a giant that juggles billions, not millions, in each hand.

(Figures in millions, except per-share data.)

Income Statement Highlights

	Q2 2008	Q2 2007	Change
Sales	$16,367	$12,542	30.5%
Net Profit	$4,707	$2,626	79.2%
EPS	$0.50	$0.26	92.3%
Diluted Shares	9,503.0	9,942.0	(4.4%)

Get back to basics with the income statement.

Margin Checkup

	Q2 2008	Q2 2007	Change*
Gross Margin	78.4%	71.1%	7.3
Operating Margin	39.6%	27.7%	11.9
Net Margin	28.8%	20.9%	7.9

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets	Q2 2008	Q2 2007	Change
Cash + ST Invest.	$21,076	$26,400	(20.2%)
Accounts Rec.	$11,621	$9,895	17.4%
Inventory	$755	$1,725	(56.2%)

Liabilities	Q2 2008	Q2 2007	Change
Accounts Payable	$3,612	$2,944	22.7%
Long-Term Debt	$0	$0	N/A

The balance sheet reflects the company's health.

Cash Flow Highlights

	Q2 2008	Q2 2007	Change
Cash From Ops.	$4,567	$2,042	123.7%
Capital Expenditures	$695	$572	21.5%
Free Cash Flow	$3,872	$1,470	163.4%
Owner Earnings	$4,493	$2,419	85.7%

Free cash flow is a Fool's best friend.

Competitive Context

	Market Cap	Trailing P/E Ratio	CAPS Rating
Microsoft	$323,510	22.7	***
Apple (Nasdaq: AAPL)	$120,780	30.2	***
International Business Machines (NYSE: IBM)	$147,900	14.8	***
Oracle (Nasdaq: ORCL)	$107,920	23.0	****
Adobe Systems (Nasdaq: ADBE)	$20,160	29.0	****

Using the latest reported numbers from Capital IQ. Keep your partners close and the competition in your vest pocket.

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