Microsoft Corporation

Microsoft Corporation - Financial and Strategic Analysis Review

Publication Date: 27-Mar-2013 Reference Code: GDTC22599FSA

Company Snapshot
Key Information
Microsoft Corporation, Key Information Web Address www.microsoft.com Financial year-end June Number of Employees 94,000 NASD MSFT
Source : GlobalData

Company Overview
Microsoft Corporation (Microsoft) is one of the leading providers of software and hardware products and services. The company focuses on developing, manufacturing, licensing, and supporting software products worldwide. Its major products include operating systems for personal computers (PCs), servers, phones, and other intelligent devices; desktop and server management tools; business solution applications; productivity applications; server applications for distributed computing environments; software development tools; video games; and online advertising.

Key Ratios
Microsoft Corporation, Key Ratios P/E EV/EBITDA Return on Equity (%) Debt/Equity Operating profit margin (%) Dividend Yield
Note: Above ratios are based on share price as of 25-Mar-2013 Source : GlobalData

14.11 10.96.00 25.58 18.00 29.92 0.03

SWOT Analysis
Microsoft Corporation, SWOT Analysis Strengths Weaknesses Comprehensive Product Portfolio Consistent Increase in Revenue Strong Intellectual Property Legal Proceedings Declining Brand Equity Increased Debt

Share Data
Microsoft Corporation, Share Data Price (USD) as on 25-Mar-2013 EPS (USD) Book value per share (USD) Shares Outstanding (in million)
Source : GlobalData

Opportunities 28.16 2.00 7.92 8,506 Demand for Smartphones Growing Cloud Computing Markets Strategic Acquisitions

Threats Foreign Currency Exchange Rate Risk Rapid Technological Changes Highly Competitive Environment

Performance Chart
Microsoft Corporation, Performance Chart (2008 - 2012)

Source : GlobalData

Financial Performance
The company reported revenues of (U.S. Dollars) USD 73,723.00 million during the fiscal year ended June 2012, an increase of 5.40% over 2011. The operating profit of the company was USD 22,061.00 million during the fiscal year 2012, a decrease of 19.02% from 2011. The net profit of the company was USD 16,978.00 million during the fiscal year 2012, a decrease of 26.66% from 2011.

Source : GlobalData

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Microsoft Corporation Microsoft Corporation - SWOT Analysis

SWOT Analysis - Overview Microsoft Corporation (Microsoft) is one of the leading providers of software and storage products and services. The company enjoys a competitive position in the industry through its comprehensive product portfolio. Microsofts substantial debt and involvement in legal proceedings are major causes for concern. The company, with focus on research and development, and inorganic growth, could cash in on the growing demand for cloud computing and enhance its business. The technological changes, intense competition across the segments, and the extensive use of pirated versions of its products pose a huge threat to the companys future growth. Microsoft Corporation - Strengths Strength - Comprehensive Product Portfolio Microsoft offers a comprehensive range of software, services, and hardware solutions across different customer classes, which enable it to enjoy a leading market position. Microsoft generates revenue by developing, manufacturing, licensing, and supporting software and services across a wide variety of computing devices. The company does business worldwide through offices in more than 100 countries. Microsoft carries out the development of systems (servers, personal computers, and intelligent devices), server applications (distributed computing environments), information worker productivity applications, business solution applications, high-performance computing applications, software development tools, video games, and online advertising. Microsoft also provides consulting and product and solution support service, and trains and certifies computer system integrators and developers. It also concentrates on the development of various cloud-based solutions that provide customers software, services and content over the Internet by way of shared computing resources located in centralized data centers. The comprehensive product portfolio of Microsoft enables it to cater to a wide variety of customer requirements across industries and geographies. Strength - Consistent Increase in Revenue Consistent increase in revenue not only helps the company to achieve financial stability, but also provides the necessary internal funding for the expansion of its operations further. Microsofts revenue increased during 2009-2012 at a compound annual growth rate (CAGR) of 5.98% from $58,437m in 2009 to $73,723m in 2012. During the fiscal year ended 2012, the companys revenue increased 5.4% to $73,723m, as compared to $69,943m in 2011. This significant increase in revenue is due to strong sales of Server and Tools products and services and the Microsoft Office 2010 system, partially offset by the decrease in Windows operating system revenue. For the fiscal year ended 2012, the Server and Tools segment reported revenue of $18,696m, recording an increase of 12% over that in fiscal year 2011. The segment accounted for 25.27% of the companys total revenue in 2012. Consistent increase in revenue may indicate that the company is efficiently using the shareholders' money and that it is generating high returns for its shareholders compared to other companies in the sector. Strength - Strong Intellectual Property Securing patent rights is important for the development of the companys product portfolio. Strong patent portfolio creates market exclusivity to the proprietary technology, giving the company an edge over its competitors. The company's success depends primarily on its ability to maintain and establish the proprietary nature of its technology through the patent process. The company protects intellectual property investments in a variety of ways. It actively works in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to its software and hardware products, services, business plans, and branding. Microsoft maintains a comprehensive U.S. and international portfolio of intellectual property which help it in protecting its technologies. As of December 2012, Microsoft is one of the leading technology companies with a portfolio of over 31,000 U.S. and international patents issued and over 38,000 pending. Microsoft is also involved in outbound and inbound licensing of related patented technologies that are incorporated into licensees or Microsofts products. The company also purchases or license technology that it incorporate into products or services. A strong patent portfolio would help the company protect its various products from being infringed, strengthen its market presence and generate revenue through milestone licensing fees. Strength - Focused Research and Development Activities Prioritizing innovation and optimization through strong research and development activity, the company develops a strong competitive advantage and builds brand equity. Key research areas of the company include algorithms and theory, hardware development, human-computer interaction, machine learning, adaptation, and intelligence, multimedia and graphics, systems, architecture, mobility, networking, security, cryptography, smart connected devices and cloud computing among others. The companys innovation investments focus on the emerging technology trends and breakthroughs across a wide spectrum of technologies, tools, and platforms spanning communication and collaboration; information access and organization; entertainment; business and e-commerce; advertising; and devices. The company started Microsoft Research Group in 1991 to explore the possibilities of developing new technologies. Microsoft has research facilities in Beijing

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Microsoft Corporation

(China), Cambridge (the UK), Bangalore (India), Canada, Denmark, Ireland, Israel and in New England, Redmond, and Silicon Valley in the US. The company also operates Microsoft Research, one of the worlds largest computer science research organizations, and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science sector. Microsofts research and development expense were $9.8 billion, $9.0 billion and $8.7 billion, during fiscal years 2012, 2011, and 2010, respectively. These expenses accounted for approximately 13%, 13%, and 14%, respectively, of revenue in each of those years. Focused research and development allows the company to introduce new products/services and optimize its existing portfolio, which enables it to generate greater benefits. Microsoft Corporation - Weaknesses Weakness - Legal Proceedings The company is defendant in various unresolved cases against it. The company is engaged in various legal proceedings relating to product design, manufacture and performance liability and other litigations relating to contracts, employment issues or intellectual property rights. Legal proceedings incur additional costs to the company, and if proven guilty will result in huge penalties that will adversely affect its profitability. In May 2012, the company was ruled against in a patent infringement case against Motorola Mobility Holdings Inc and ordered Microsoft to remove its Xbox 360 gaming consoles and Windows 7 operating system software from the German market. The company was ruled against in patent infringement litigation filed by Alcatel-Lucent and the company had to pay $500m to settle the case. Currently, the company is defending approximately 60 patent infringement cases filed against it. Besides, Microsoft is also defending several antitrust and unfair competition class action lawsuits filed against it. These kinds of litigations against the company would dent its reputation and could also affect future business. Weakness - Declining Brand Equity The company reported a decline in brand equity growth, which could affect its brand valuation and brand image in the industry. The companys overall world ranking in Global Top 100 from Millward Brown Optimor decreased from the top to fifth in 2012. The company reported brand value of $76,651m in 2012, as compared to $78,243m in 2011, representing a decrease of 2%. Prior to this, the company has recorded brand values of $76,249m in 2009 and $70,887m in 2008. In 2012, Apple Inc. recorded an increase of 19% in its brand value. The declining brand equity could affect the overall brand image of the company. Weakness - Increased Debt The company reported an increase in its debt in its balance sheet. As at the end of fiscal year 2012, the company reported total debt of $11,944m, as compared to $5,939m in 2010, reflecting an increase of 101%. Microsoft registered debt to equity ratios of 18% as of fiscal year ended 2012; reflecting significant increases from 12.86% in 2010. The net debt to equity ratio of the company increased from 0.094 in 2010 to 7.54% in 2012. A highly leveraged balance sheet could result in a substantial portion of cash flow from operations being used for the payment of principal and interest; could restrain the companys ability to secure additional financing at favorable costs; and limits its ability to make adjustments to its capital structure in case of significant changes in the market and economy. Microsoft Corporation - Opportunities Opportunity - Demand for Smartphones The company could capitalize on the growing demand for smartphones, which are emerging as a major growth opportunity for mobile device manufacturers. According to industry analysts, the global market for smartphones, is predicted to reach from 487 million units in 2011 to more than 675 million units (approximately 35%) in 2012, more than 907 million units (approximately 35%) in 2013 and surpass 1 billion by 2014. The growth would be driven by factors including lower product cost, improved handset design and functionalities, the expansion of global mobile email and browsing services, the emergence of 3G and 4G network technologies, and the standardization and upgrades of operating systems. Considerable demand is expected from developing countries, particularly the Asia-Pacific region, besides North America. Emerging countries including China, India and Brazil are expected to witness significant usage in smartphones other than the US and the UK. By 2016, China would be leading the smartphone market with approximately 20% of market share, followed by the US (approximately 15%), India (approximately 10%), Brazil (approximately 5%) and the UK (approximately 4%). The company could look forward to increase its market presence across the emerging countries to fuel its revenue growth. Opportunity - Growing Cloud Computing Markets The company could capitalize on growth potential in cloud service market with its offerings in cloud computing and managed IT solutions. Microsoft could expand its addressable market opportunity through cloud computing. The company provides content and services to business users through the Microsoft Online Services platform, which includes cloud-based services such as Exchange Online, Microsoft Dynamics CRM Online, Microsoft Lync, Microsoft Office 365, Microsoft Office Communications Online, Microsoft Office Live Meeting, SQL Azure, SharePoint Online, Windows Azure, and Windows Intune. According to the industry analysts, the global market for global cloud computing is forecast to grow

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Microsoft Corporation

from $37.8 billion in 2010 to $121.1 billion in 2015 at a CAGR of 26.2%. According to estimates, the cloud computing market of Germany is expected to grow from 1.14 billion in 2010 to 8.2 billion in 2015, at an average growth rate of 48%. The cloud computing market is expected to account for approximately 10% of total IT expenditure in Germany by 2015. North American and European virtualization markets are expected to grow at a CAGR of 8.5% during 2010-2016. The company could benefit from the growing demand in cloud-based services sector. Opportunity - Strategic Acquisitions The company expands its boundaries of operations and increases its customer base through acquisitions. In October 2012, Microsoft acquired PhoneFactor Inc., a provider of multifactor authentication (MFA) solutions. This acquisition would help the company bring effective and easy-to-use multifactor authentication to its cloud services and on-premises applications. Also during the same month, Microsoft announced that it has reached a definitive agreement to acquire StorSimple Inc., a provider of Cloud-integrated Storage (CiS) solutions. The addition of CiS would advance Microsofts Cloud OS vision and help customers more efficiently embrace hybrid cloud computing. In July 2012, Microsoft entered into a definitive agreement to acquire Perceptive Pixel Inc. (PPI), a leader in research, development and production of large-scale, multi-touch display solutions. Acquisition of PPI would allow the company to draw on its complementary strengths. In June 2012, the company entered into a definitive agreement to acquire Yammer Inc., provider of enterprise social networks. The acquisition would add best-in-class enterprise social networking service to the companys growing portfolio of complementary cloud services. The strategic expansion initiatives would help the company expand its business presence to new geographical regions and gain better market coverage. Opportunity - Partnerships and Collaborations The company could benefit from the various strategic partnerships that it enters. In February 2013, Microsoft introduced the Microsoft 4Afrika Initiative, a new effort to help place tens of millions of smart devices in the hands of African youth by 2016. Also during the month, the company in collaboration with the government of Kenyas Ministry of Information and Communications and Indigo Telecom Ltd., launched a pilot project to deliver low-cost wireless broadband access to locations near Nanyuki and Kalema, Kenya. In January 2013, Microsoft signed a patent licensing agreement that gives BMW access to the latest Extended File Allocation Table (exFAT) to enhance the digital entertainment offerings in BMWs line of automobiles. The company entered into a transformative three-year Joint Enterprise Licensing Agreement with the U.S. Army, U.S. Air Force and Defense Information Systems Agency for expanded access to its solutions. In December 2012, Microsoft announced plans to make Microsoft Surface available at additional retailers and transition of several of the stores into permanent Microsoft retail outlets. In April 2012, the company entered into strategic partnership with Barnes & Noble, Inc to accelerate the transition to e-reading. The company also acquired over 800 patents and their related patent applications from AOL Inc. In February 2012, the company entered into a strategic application partnership with Good Technology to enable the use of the Good for Enterprise solution on Windows Phone devices. In January 2012, Microsoft and TechStars enhanced their relationship through the new BizSpark Plus program for accelerators and incubators. Partnerships and collaborations would enable the company to enhance its product and service offerings and serve its customers better. Microsoft Corporation - Threats Threat - Foreign Currency Exchange Rate Risk Exchange rate volatility could have an adverse effect on the company's financial results. The company is geographically diversified and has operations in many parts of the world. The company operates in over 100 countries and a significant part of its revenue comes from international sales. The asset values, earnings and cash flows are influenced by a range of currencies. A substantial portion of overseas sales could be affected by foreign currency exchange rate fluctuations. A significant portion of revenues generated from overseas business operations are denominated in currencies such as U.S. Dollar, Chinese Renminbi, European Euro, U.K. Pound Sterling and Canadian Dollar. It is exposed to currency risks associated with the purchases, sales and borrowings from different markets. Changes in the exchange rates could affect the consolidated results of operations and thereby impact its overall profitability. Threat - Rapid Technological Changes The technology market is subject to rapid changes, and to compete effectively, the company must continually introduce new products that achieve market acceptance. The IT enabled communication equipment industry is characterized by fast technological changes, evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make the existing products or products under development obsolete or unmarketable. In order to remain competitive and increase its sales, the company needs to adapt to the rapidly changing business environment. Threat - Highly Competitive Environment

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Microsoft Corporation
Intense competition across business segments could limit the companys business prospects. Microsoft faces stiff competition in all its operating segments. The major competitors of Microsoft include Apple, BMC, CA, Inc., Hewlett-Packard, IBM, Nintendo and Oracle. In the online search engine sector, the company faces competition from Google and Yahoo, which are the major players in the market. Huge competition across its business segments could make the company susceptible to market pressures, leading to a loss in market share and decline in revenue. Threat - Availability of Pirated Versions of its Products Microsoft is exposed to a major threat related to the availability of pirated versions of its software products. Every year, the company loses billions of dollars due to the circulation of pirated versions across the world. Microsoft loses significant amounts of revenue owing to the piracy rate of 30% or more in several countries. Though the damage is limited in the US, due to its stringent intellectual property laws, it faces enormous losses in those countries with comparatively lax copyright laws. For instance, pirated versions of Windows 7 are already available across China. This has been a major threat to the company and will always remain a cause for concern, affecting its business growth.

NOTE: * Sector average represents top companies within the specified sector The above strategic analysis is based on in-house research and reflects the publishers opinion only

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