For the first time yesterday, Microsoft (NASDAQ:MSFT) issued an earnings report that included stock-based compensation. And the results were pretty solid. Second-quarter revenues were substantially higher, showing a 19% leap from $8.5 billion to $10.2 billion. Earnings compared to the same quarter last year were down 17%, from $0.17 to $0.14.
I know what some of you are thinking. "I thought you just said that the results were strong! What's this about lower earnings?"
At this time last year, Microsoft was still awarding stock options to employees, which are not reported on the income statement due to a loophole in U.S. accounting standards. But this past summer, Microsoft elected to switch from the murky costs of stock options to the more definable restricted stock grants. This means that the company is able to tell exactly how much in stock compensation it is granting to its employees. For the quarter, that number was $2.17 billion, or about $0.20 per share.
This also means that the results for this quarter, when compared to those from a year ago, have a 20-cent weight on them. Part of this expense was the large conversion that Microsoft offered to employees. It isn't reasonable to expect that it will be paying out more than $2 billion in stock-based compensation each quarter. We hope. The company stated that $0.14 per share of that amount was due to the conversion.
So, the headlines you see that state "Microsoft Earnings Down" are proof positive that one should not invest by paying attention to headlines. Not that we divine tea leaves or anything, but I found it quite funny that immediately upon the release of the numbers, Microsoft's stock declined more than 2% (that's $6 billion), only to quickly rebound.
Nearly all of Microsoft's operating segments grew, led by its Office and Server suites. This is particularly interesting given the rise in open source software alternatives to Windows -- perhaps it's hurting Mr. Softy on the margins, but the harm certainly isn't apparent in gross revenues.
The biggest concern from this quarter's numbers lay in its deferred revenue accounts. Since Microsoft derives much of its revenues from subscriptions, it will consistently have been paid money by customers for services not yet rendered. These cannot be counted as earnings, so they're held aside as unearned or deferred revenues. Analysts use these numbers to divine the health of a company's subscription businesses. Microsoft's deferred revenue dropped by $768 million from a year ago, $395 million sequentially. Its management, though, stated in its conference call (courtesy of CCBN StreetEvents) that it feels "good about where we ended the quarter" regarding its deferred revenues.
Investors should take some comfort in the top-line growth, which was much higher than anticipated (quite a feat given the sheer size of $10 billion), but should be concerned about continued threats from open sourcing. Many companies have had their capital expenditure budgets on cold storage for the past three years, and Microsoft's results may be representative of a replacement cycle, rather than the old dependable upgrades.
Would you be sweating bullets if your stock lost $6 billion in value at the drop of a hat? What do you think about Microsoft's move to put stock options on the books? Should the software giant be worrying about open source? Talk it out with other Fools on the Microsoft discussion board. Only on Fool.com.
