Microsoft: Giving it the Salesforce Treatment

Standard

Regular readers will know I run the Salesforce quarterly numbers to see how Dynamics CRM’s strongest competitor is travelling. I will occasionally get asked what the numbers for Microsoft are like, using the same filters. My response is usually that Microsoft release very little information about their Dynamics CRM business but we can review Microsoft as a whole (and the Microsoft Business Division to a smaller extent).

The Numbers

For Microsoft, we go to the Microsoft Investor Relations Annual Reports site. If there is anything specific on the Dynamics division (called Microsoft Business Division) or Dynamics CRM division, this is where we will find it. This also means the data is yearly, rather than quarterly, but trends will still be apparent. The numbers and information below, unless stated otherwise, comes from the 2013-2009 annual reports.

Here are the numbers for Microsoft as a whole (in millions):

  2009 2010 2011 2012 2013
Revenue 58,437 62,484 69,943 73,723 77,849
Revenue Cost 12,155 12,395 15,577 17,530 20,249
Operating Cost 27,205 25,991 27,205 34,430 30,836
Microsoft Income 14,569 18,760 23,150 16,978 21,863
Revenue Growth # yoy   4,047 7,459 3,780 4,126
Revenue Growth % yoy   7% 12% 5% 6%
Total Cost % yoy   -2% 11% 21% -2%
Staff 93,000 89,000 90,000 94,000 99,000
Staff Growth (yoy)   -4% 1% 4% 5%
Margin 25% 30% 33% 23% 28%

Points of note are:

  • While revenues are steadily growing, costs seem to jump around a bit, specifically operating costs
  • Revenue growth is consistently positive, although much smaller than Salesforce’s
  • Staff growth is also much smaller than Salesforce’s
  • Microsoft makes a profit. Margins are consistently around 20-30% compared to Salesforce whose margin sits around –10%

For the Microsoft Business Division, of which Dynamics CRM belongs, we have:

  2009 2010 2011 2012 2013
Revenue 19,211 19,525 22,407 24,082 24,738
Implied Cost 8,058 7,416 7,940 8,279 8,549
Operating Income 11,153 12,109 14,467 15,803 16,189
Revenue Growth # yoy   314 2,882 1,675 656
Revenue Growth % yoy   2% 15% 7% 3%
Total Cost % yoy   -8% 7% 4% 3%
Margin 58% 62% 65% 66% 65%

As the only numbers in the annual report refer to the Operating Income and Revenue, we imply the cost by working out the difference.

Points of note are:

  • Consistent revenue growth but, again, smaller than Salesforce’s
  • Costs appear to be reasonably fixed which means Operating Income keeps growing and growing
  • The margin for the Microsoft Business Division is 65%. That is huge by any measure

It should be noted that the Microsoft Business Division also includes the Office products so this is obviously going to skew the numbers given the size and ubiquity of the Office suite in the business world.

Earnings Call Buzzword Bingo

Steve Ballmer does not get involved with the earnings calls, leaving it up to Chris Suh, General Manager of Investor Relations and Amy Hood, the CFO.

The latest transcript gives us the following keywords.

  • Revenue (39 times)
  • Windows (25 times)
  • Surface (17 times)
  • Devices (17 times)
  • Office (16 times)
  • Cloud (16 times)
  • Customers (11 times)
  • xbox (11 times)

It is a pity customers do not get a higher mention given they are the main thing Marc talks about in his calls. Revenue is a common theme with the two companies though. Otherwise, the usual peppering of products and services is effectively the rest of the hits.

Insider and Institutional Sales

The results here surprised me. Microsoft executives like selling stock as much as Salesforce ones.

Over the last six months, Microsoft executives have offloaded about 5% of their stock, about ten times of their Salesforce counterparts. However, it is not hard to see where the majority of this is coming from. Almost the entire amount is Bill Gates offloading his shares to raise money for the Bill and Melinda Gates foundation.

It is true that Amy Hood has offloaded about $700,000 in shares in the past six months which is comparable to Salesforce’s CFO who has offloaded about $900,000 in shares over the same period.

Institutions are also selling but not a lot. Over the last six months, institutions sold 0.13% of their holdings.

In terms of long term ownership, after a bit of digging, I found the original 1986 prospectus for Microsoft. The original executive, and their post-prospectus ownership was:

  • William H. Gates III (44.8%)
  • Paul G. Allen (24.9%)
  • Steven A. Ballmer (6.8%)
  • Jon A. Shirley (1.4%)

Of these, Bill Gates and Steve Ballmer are the only ones remaining on the executive. From Yahoo, we know Bill owns 358 million Microsoft shares and there are 8.35B shares outstanding. Therefore his ownership is now about 4%. For Ballmer, the latest transaction I can find is from 2010. At that time he owned 333 million shares which compared to 8.668B shares. Therefore, at that time, Ballmer owned about 4% of the company as well.

So, like Salesforce, the two executives have reduced their ownership of the company they work for. Given Bill is selling for his charity and Steve has resigned this is not as surprising as Salesforce’s co-founders Marc and Parker but it means we cannot cast stones too strongly.

While the executives have been selling, Microsoft has been buying. In 2008, Microsoft announced a share repurchase plan, spending $40b on share repurchases over five years, which is now complete. Share repurchases are what companies do when they have lots of cash, not many places to spend it and their share price is cheap. It demonstrates Microsoft believe in their own business and feel this is the best investment they can make for their shareholders. There is no equivalent plan in place for Salesforce, as far as I know.

Conclusions

In terms of the financials, Microsoft is making a profit and has very healthy margins and is not using non-GAAP reporting to convert losses into profits. Costs seem to be in check and there is no evidence of deterioration of the numbers. Things are not growing as quickly as Salesforce but there is no reckoning coming in terms of reining the costs in, as with Salesforce.

In terms of the buzzwords, it seems the same things that concern Salesforce, also concern Microsoft i.e. customers, revenues and their products/services.

Finally, in terms of executive commitment to the company, while the people themselves are also leaving their baby, Microsoft believes their stock is cheap as evidenced by their repurchase plan. A cynical view of repurchase plans is the company is running out of ideas to invest in but when you have fifty times the current assets of Salesforce and only ten times larger, in terms of market capitalisation, it is feasible that Microsoft may have a few bundles of cash lying around to make use of to buy shares.

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