Microsoft’s financials: What they say about the company
Key takeaways for investors from Microsoft’s 1Q15 earnings review (Part 12 of 14)
Impact on 1Q15 margins due to layoffs and Nokia acquisition
With $378 billion market capitalization, Microsoft (MSFT) is a leading player in the enterprise software arena. Microsoft, like its peers IBM (IBM) and Hewlett-Packard Co. (HPQ), has been criticized lately for not innovating and changing rapidly to the increasingly adopted cloud environment. However, Microsoft’s (MSFT) 1Q15 results have provided a temporary relief. Microsoft’s revenue growth has been modest with margins not showing a very clear trend.
Microsoft’s (MSFT) 1Q15 earnings per share (or EPS) declined by 13% due to $1.1 billion restructuring charges associated with its massive layoffs in July 2014. It caused a dent of 11 cents per share in its earnings. As part of its layoff plan, Microsoft shut down the Nokia Chennai, India, plant and fully withdrew manufacturing functions from the subcontinent.
To read in detail about Microsoft’s massive layoffs, please read the Market Realist’s series Why Microsoft laid off 18,000 employees
Cash, debt, dividends, and cash flow
Microsoft’s total debt as of 1Q15 decreased to $21.97 billion, compared to $22.7 billion in fiscal year 2014. The company’s cash reserves stood at $89.2 billion, compared to $85.7 billion in fiscal year 2014. It generated operating cash flow worth $8.35 billion. Microsoft’s high debt is primarily taken to fund dividends and share buybacks. Leading technology players Apple (AAPL), Intel (INTC), and IBM (IBM) have followed the same route. Microsoft’s cash position and increasing trend in cash flows provide a buffer against any uncertainties the company might face in the near future.
Dividend and buyback program
In 1Q15, Microsoft raised its per-share payout or dividend per share (or DPS) from 28 cents per share to 31 cents per share, an increase of 10.7% on a quarter-over-quarter basis. Microsoft is known for its share buybacks. It has returned nearly $73 billion to its shareholders in the last five years, including $40 billion in share buybacks and $32.5 billion in common dividends.
By looking at the financials of Microsoft, one question that arises is if the company has such a high cash generation business along with lots of cash, why is it raising debt to fund dividends and share buybacks. The most likely reason is that most of the company’s cash is parked abroad, and it has to pay a 35% penalty on any repatriated funds.
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