April 15, 2010 TECHNOLOGY (Systems Software)
Henry Fund Research
Microsoft Corporation (MSFT) Investment Recommendation BUY
Eric Eckerman Current Price $30.67
eric-eckerman@uiowa.edu Target Price Range $30-35
INVESTMENT THESIS
(+) Windows 7 and future versions of the
Windows will continue to be the dominant
operating system for desktop and laptop PCs.
(+) Growth in emerging markets will lead to
increased demand for computing and mobile
devices that run operating systems. Microsoft’s
global footprint and worldwide relationships with
OEMs positions the company for growth in both
revenue and volume in these emerging
economies.
Source: Yahoo Finance (i)
(+) The company has strong financials including
over six billion in cash and very little debt giving
the company the opportunity to grow through
Key Stock Statistics acquisition. A company like Akamai
52-Week Price Range $18.47-30.98 Technologies might provide many synergies.
Market Capitalization (B) $268.99 (+) The Bing search engine has gained market
Shares Outstanding (B) 8.77 share for ten consecutive months (11.7% as of
March). Bing’s future growth and integration with
Institutional Ownership 64.80%
applications such as Facebook may allow for new
60-Month Beta 0.94 avenues of revenue generation through
Dividend & Yield 0.52 (1.70%) advertising.
Price/Earnings (ttm) 16.90 (+) Microsoft’s entry into the mobile device space
Price/Book (mrq) 6.14 with Kin One and Kin Two may prove to be a way
Price/Sales (ttm) 4.61 to draw younger users into a lifestyle technology
product. Further, the potential release of the
ROA (ttm) 18.67%
“Courier,” an iPad rival may prove to be a
ROE(ttm) 41.28% success.
Projected 5-Year Growth 11.25%
(+) The inevitable move of companies and
EPS ($) eventually individuals to cloud computing plays
Year 2007 2008 2009 2010E 2011E 2012E well to Microsoft’s current and future products as
EPS 1.44 1.90 1.63 1.59 1.67 1.77 well as its business strategy. Microsoft Azure has
All earnings represent earnings from operations and have been filtered been released and addresses many needs and
from net nonrecurring gains. concerns of the cloud computing market.
Valuation Models (+) Microsoft is the world’s largest supplier of
Discounted Cash Flow 34.93 operating systems for servers. As the demand for
Economic Profit 34.93 cloud computing grows the increased need for
more servers will play well to Microsoft’s strength
Fundamental P/E 32.33
in offering secure and supported operating
Relative P/E 27.65 systems.
Important disclosures appear on the last page of this report.
THE UNIVERSITY OF IOWA
Henry Fund Research Henry B. Tippie School of Management
The company is divided into five operating segments:
Client, Server and Tools, Online Services Business,
EXECUTIVE SUMMARY Microsoft Business Division and Entertainment and
The global recession over the past several quarters has Devices Division. The segments are designed to align
negatively impacted Microsoft and the software strategies and provide a framework for resource
industry. As most economies are slowly emerging from allocation.
the recession, the software industry will slowly recover
at roughly the same pace. However, Microsoft will see The following chart depicts a breakdown of Microsoft’s
a slightly quicker recovery than the industry due to its 2009 revenue by operating segment.
dominance and popularity as the operating system of
choice on most PCs and laptops.
While, we see unemployment remaining around 10%
throughout the next year, the expense reduction
initiatives most companies underwent will allow for
increased IT spending as companies look to gain
further efficiencies. In addition to the Windows
operating system and the Office product suite, Microsoft
offers numerous other products such as server software
that provide the efficiencies companies are looking to
gain.
We foresee a continued shift to the integrated mobile
experience and a move towards cloud computing both
of which Microsoft will need offer key products and Source: Microsoft 2009 Annual Report (ii)
services to remain a tech leader. The company will
also benefit by being open-minded about how it adapts Client
the Windows operating system to the changing world.
Finally, well organic growth through a new product or The client segment is responsible for technical
service is ideal, a strategic acquisition of a company architecture, engineering and delivery of the Windows
such as Akamai Technologies could quickly lead to products family as well as relationships with original
growth opportunities is new and existing fields such as equipment manufacturers (OEMs). Approximately 80%
cloud computing and internet data management. As of Client revenue is generated through OEMs.
consumers and businesses move to remote network Therefore, revenue growth is directly impacted by the
access and remote data storage and retrieval, Microsoft growth of PC purchases from OEMs that pre-install
Azure and the company’s server software is well- versions of the Windows operating systems. The latest
positioned to take garner market share in this emerging version of Windows, Windows 7, was released to OEMs
sector. in July 2009.
Products: The primary products include all versions of
Windows operating systems ranging from standard to
COMPANY DESCRIPTION premium.
Microsoft is a global technology company that Competition: The Client segment faces strong
generates revenue by developing, manufacturing, competition from well-established companies that have
licensing and supporting a wide range of software differing approaches to the PC market. Competing
products and services for many different types of commercial software products, including variants of
computing devices. The company also provides UNIX, are supplied by competitors such as Apple,
consulting, product and solution support services as Canonical and Red Hat. Apple has gained market
well as training and certification for integrators and share by bringing an integrated approach to the PC
developers. Microsoft also designs and sells hardware experience. The Linux operating system, which is
and peripherals such as the Xbox 360 video game derived from Linux and is available without payment
console and the Zune digital music player. The under a General Public License, is gaining acceptance
company’s stated mission is to enable people and as OEMs look for ways to reduce costs and lower-price
businesses throughout the world to realize their full pseudo-PC devices and netbooks become
potential. commonplace. Competitors such as Apple, Google,
Mozilla and Opera Software Company offer software
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that competes with the Internet Explorer Web browsing providers to build, market, and support a series of
capabilities of Windows products. solutions to enhance the interoperability of its products
with their virtualization, management, and network
Server and Tools security solutions, and to provide each other’s
customers with patent coverage for their respective
Server and Tools develops and markets software products. Microsoft competes to provide enterprise-
server products, software developer tools, services and wide computing solutions with several companies that
solutions. Windows Server-based products are offer solutions and middleware technology platforms.
integrated server infrastructure and middleware
software designed to support software applications built Also, numerous commercial software vendors offer
on the Windows Server operating system. Windows competing software applications for connectivity (both
Server-based products include the server platform Internet and intranet), security, hosting and e-business
including targeted segment solutions, database, servers. Microsoft aims to provide customers with
storage, management and operations, service-oriented advantages in innovation, performance, total costs of
architecture platform, and security and identity ownership and productivity by delivering superior
software. The segment also builds standalone and applications, development tools and compatibility with a
software development lifecycle tools for software wide range of hardware and software applications,
architects, developers, testers, and project managers. security and manageability.
Server products can be run on-site, in a partner-hosted
environment, or in a Microsoft-hosted environment. Online Services Business
Microsoft offers a broad range of consulting services
and provides product support services that assist The Online Services Business consists of an online
customers in developing, deploying, and managing advertising platform that offers publishers and
Microsoft server and desktop solutions. The segment advertisers, online information offerings such as Bing,
also provides training and certification to developers MSN Portals and channels, and personal
and information technology professionals about the communications services such as email and instant
Server and Tools Division, Microsoft Business Division, messaging around the world. The majority of revenue is
and Client platform products. earned from online advertising through search, display,
and email and messaging services. Revenue is also
Multi-year licensing agreements provide 50% of the generated through subscriptions and transactions
Server and Tools revenue, 20% is derived from fully generated from online paid services from advertiser and
packaged product and transactional volume licensing publisher tools, and digital marketing and advertising
programs and the remaining 10% is from licenses sold agency services. New releases of the company’s
to OEMs. proprietary advertising platforms, adCenter and
adExpert, were launched in 2009. Also, Microsoft
Products and Services: Windows Server operating launched its new search engine, Bing.
system; Microsoft SQL Server; Visual Studio; In December 2009, Microsoft entered into a definitive
Silverlight; System Center products; Forefront security 10-year agreement with Yahoo! whereby Microsoft will
products; Biz Talk Server; Microsoft Consulting provide the exclusive algorithmic and paid search
Services; Premier product support services; and other platform for Yahoo websites.
products and services.
Products: Bing; Microsoft adCenter/adExpert;
Competition: Microsoft’s server operating system Microsoft Media Network (MMN); MSN portals,
products face strong competition from a wide variety of channels, and mobile services; Windows Live suite of
server operating systems and server applications applications and mobile services; Atlas online tools for
offered by companies with a variety of market advertisers and publishers; MSN Premium Web
approaches. Vertically integrated computer Services (consisting of MSN Internet Software
manufacturers such as Hewlett-Packard, IBM, and Sun Subscription, MSN Hotmail Plus, and MSN Software
Microsystems offer their own versions of the UNIX Services); and Razorfish media agency services.
operating system preinstalled on server hardware.
Nearly all computer manufacturers offer server Competition: The segment competes with AOL,
hardware for the Linux operating system and many Google and a wide array of Web sites and portals that
contribute to Linux operating system development. provide content and online offerings of all types to end
users. We compete with these organizations to provide
Microsoft has entered into business and technical advertising opportunities for merchants. The Internet
collaboration agreements with Novell and other Linux advertising industry has grown significantly over the
past several years, and we anticipate that this trend will
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Henry Fund Research Henry B. Tippie School of Management
continue long-term. Competitors are aggressively as research, sales, and support of those products. The
developing Internet offerings that seek to provide more division also offers the Zune digital music and
effective ways of connecting advertisers with audiences entertainment device and accessories; PC software
through enhanced functionality in information services games; online games; Mediaroom, our Internet protocol
such as Internet search, improvements in television software; the Microsoft Surface computing
communication services, and improved advertising platform; and mobile and embedded device platforms.
infrastructure and support services. EDD also drives the development of consumer software
and hardware products including application software
Microsoft Business Division for Macintosh computers and Microsoft PC hardware
products, and is responsible for all retail sales and
Microsoft Business Division (MBD) consists of the marketing for Microsoft Office and the Windows
Microsoft Office system and Microsoft Dynamics operating systems.
business solutions. Microsoft Office system products Products: The primary products include Xbox 360
are designed to increase personal, team, and game console and games; Zune; numerous software
organization productivity through a range of programs, and hardware products such as mice and keyboards;
services, and software solutions. Over 90% of MBD Windows Mobile software and service platforms and
revenue is generated from Office. Future growth of Embedded device operating systems.
Office is dependent upon the company adding unique
features and including new areas of worker productivity Competition: The entertainment and devices market
such as content management, enterprise search, is very competitive with players of all sizes. Traits of
collaboration, unified communications, and business the market include short product life cycles, frequent
intelligence. Microsoft Dynamics products provide introductions of new products and titles and the
business solutions for financial management, customer development of new technologies. The market also
relationship management, supply chain management, tends to have continued pricing pressure due to the
and analytics applications for small and mid-size competition. Microsoft competes on the basis of
businesses, large organizations, and divisions of global product innovation, quality and variety, the timing of
enterprises. product releases and the impact of distribution and
Products: The primary products include Microsoft marketing. The Xbox competes with consoles from
Office, Microsoft Visio, Microsoft SharePoint Server, Nintendo and Sony. Zune faces competition from
Microsoft Exchange Server, Microsoft Dynamics ERP Apple and a number of other digital entertainment
products and Microsoft Dynamics CRM products. manufacturers. Lastly, the Windows Mobile software
competes with Apple, Google, Nokia, Samsung, Palm,
Competition: There are many customers to the Research in Motion and a handful of other mobile
Microsoft Office system such as Adobe, Apple, Corel, device software firms.
Google, IBM, Novell, Oracle, Red hat, Zoho and local
developers in Asia and Europe. Many competing suites RECENT DEVELOPMENTS
are priced to entice OEMs to pre-install them on low-
priced PCs. Google Apps, a hosted messaging and In July 2009, Microsoft Corporation announced it is
productivity suite competes with Office, Microsoft collaborating with comScore Inc. to develop a digital
Exchange and Microsoft SharePoint Server and Search media planning solution, named the Reach and
Server. Also, the OpenOffice.org project has been Frequency Planner (RF Planner), which would allow
adopted by a number of commercial software vendors brand advertisers to predict reach, frequency and
to sell under their own brand name. Microsoft audience composition at the ad placement level. (iii)
Dynamics competes with companies such as Intuit and
Sage in the small to medium sized business arena. In December 2009, Microsoft entered into a definitive
Dynamics competes with Oracle and SAP for global 10-year agreement with Yahoo! whereby Microsoft will
enterprises. The company will see future competition in provide the exclusive algorithmic and paid search
the area of content management and enterprise search. platform for Yahoo websites.
Entertainment and Devices Division In February 2010, Microsoft released Windows Azure to
support cloud computing and the management of web
The Entertainment and Devices Division (EDD) is applications.
responsible for developing, producing, and marketing
the Xbox video game system, including consoles and In April 2010, Microsoft released two mobile phone
accessories, third-party games, games published under devices, the Kin One and the Kin Two aimed at the
the Microsoft brand, and Xbox Live operations, as well social networking lifestyle of young teens.
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Henry Fund Research Henry B. Tippie School of Management
Microsoft has also been working on a tablet style device MARKETS AND COMPETITION
known as the “Courier” that would likely be a direct
competitor with the iPad. Currently, there is no The technology sector has an extremely competitive
guarantee of the product being released. landscape. Big and small players are constantly
entering the market with new products or innovations to
attract consumers and end-users. These new
developments are a constant threat to all industry
INDUSTRY TRENDS players as things can change almost overnight.
There are three major trends that are shaping the future Within the market we see trends toward mobile device
of technology and how companies will attempt to do and mobile computing. Cloud computing is viewed as a
business. separate trend that is occurring. We see cloud
computing as separate from mobile in that the
A move to cloud computing is one force shaping the processing power required in the device and in the
industry. A second and slightly related force is the move cloud as well as the amount of data being transferred
to a mobile business, computing and entertainment are much greater than in the mobile device world.
lifestyle. The third factor shaping the future of the
industry regards how companies will generate revenue Besides Microsoft, key industry players include Apple,
through advertising and how best to reach the Google, IBM, Oracle, Hewlett Packard, Yahoo, Adobe
consumer with the advertising campaigns. Systems, Symantec, Citrix Systems, VMWare and
EMC.
We see cloud computing as the next big computing
wave. Not only will companies and individuals seek to ECONOMIC OUTLOOK
utilize applications, processing power and data storage
remotely as a way to be more efficient, but also they Domestic GDP will grow slowly over the next few years
seek to reduce in-house infrastructure size and as we exit the recessionary period. Global GDP should
infrastructure cost. grow at a more rapid rate due to the growth in the
largest emerging economies. Microsoft is well
There will also be a trend toward the mobility of positioned to capitalize on the growth that will arise as
technology, which will also include an increasing use of well as any gains in productivity spending that
video for both business and pleasure. The current companies undertake to realize greater efficiencies.
success of devices such as the iPhone, portable Unemployment is expected to remain high for the next
gaming devices and netbooks suggests that consumers few years. Inflation is expected to remain fairly low with
are looking to always be connected with their business, unemployment remaining high, which should play well
their social network and the information on the internet. for technology companies.
The growth in mobile technology will increase greatly as We expect the domestic economy to see growth of
devices allow customers to be constantly connected to about 2.5% for fiscal year 2010. However, we
a network and improve the functionality of more anticipate the technology sector to see growth that is
complex tasks. Currently, smart phones are primarily larger than GDP. Businesses will continue to look for
used for texting, browsing and interacting with social gains in efficiencies through technological means. As a
networks. In the future, we see the devices allowing for result, there will be an increase in the portion of
easy reading and alteration of documents and files, the budgets allocated to IT spending.
ability to easily cut, paste, and mash content and finally
offering more natural user interface interactions. Unemployment will remain near the 10% level, as a
Natural user interfaces would include voice, touch and result of the lack of demand for the skill set of the
hand-writing recognition at a level well above the unemployed as well as companies seeking to utilize
current technology in the market place. funds for tech and not human capital as a way to
expand. The high unemployment will likely hurt
The last large trend will be the current larger tech technology companies in the entertainment and mobile
companies competing for online ad and paid search device sector. However, Companies in the personal
revenue. Google is the dominant player in online ad computing sector should see growth in line with GDP as
revenue, generating almost 90% of its revenue from consumers view a computer as more of a necessity
paid search. Microsoft recent partnership with Yahoo than a digital music player.
may allow the company to generate a growing share of
paid search revenue from both Yahoo and its own
search engine, Bing.
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THE UNIVERSITY OF IOWA
Henry Fund Research Henry B. Tippie School of Management
Further, we anticipated a slight rise in the Fed Funds businesses to make the move to cloud computing.
and T-bill rates in anticipation of increased GDP growth Lastly, the ability of Microsoft to attract consumers to its
in 2011 and 2012. Also, the dollar will remain strong Windows Mobile operating system or mobile devices
largely due to its status as the world’s reserve currency. such as the Kin or Courier will be integral to maintaining
With the rise in rates, companies will be more cautious the firm’s place as an industry leader. The ability to
in how they acquire capital, how they issue debt and integrate the functionality of the devices or mobile OS
how they spend the funding. These facets play into the everyday lives of business users and individual
favorably for the technology sector as results often start consumers needs to be the key focus for R&D and
accruing shortly after new technology is implemented. marketing.
Additionally, the option to pilot new technology before
purchase and the availability of research from current INVESTMENT POSITIVES
users are attractive features for tech spending.
(+) Windows 7 and future versions of the
Foreign economies will be mixed. We expect Europe to Windows will continue to be the dominant
lag the United States in terms of GDP even though operating system for desktop and laptop PCs.
unemployment will be lower than the U.S. rate. The
lower unemployment rate in Europe is due the (+) Growth in emerging markets will lead to
governmental structure as well as the lower level of increased demand for computing and mobile
layoffs throughout the recession. The retention of devices that run operating systems. Microsoft’s
excess employees throughout the recession will be the global footprint and worldwide relationships with
most significant factor in lower GDP output. Over the OEMs positions the company for growth in both
long-term, we expect European companies to gradually revenue and volume in these emerging
trade-off headcount spending for IT spending as many economies.
U.S. firms did throughout the recession to reduce long- (+) The company has strong financials including
term costs and gain efficiencies. over six billion in cash and very little debt giving
the company the opportunity to grow through
The BRIC countries (Brazil, Russia, India and China) acquisition. A company like Akamai
will see growth close to their pre-recessionary levels. Technologies might provide many synergies.
Although, there is some concern regarding the
accuracy of China’s numbers given the nature of the (+) The Bing search engine has gained market
pegged Yuan and the lack of transparency with share for ten consecutive months (11.7% as of
calculations on figures such as GDP. We expect IT March). (v) Bing’s future growth and integration
spending to grow at a similar rate to GDP as firms in with applications such as Facebook may allow for
these countries continue to grow. new avenues of revenue generation through
advertising.
The technology sector should fare better than most any (+) Microsoft’s entry into the mobile phone space
other sector due to the growth in the BRIC countries, with Kin One and Kin Two may prove to be a way
the reliance of business and consumers on technology to draw younger users into a lifestyle technology
and the efficiencies that can be realized thorough product.
technological means.
(+) The inevitable move of companies and
Gartner Inc, a prominent IT research and consulting eventually individuals to cloud computing plays
firm, expects global spending on technology products well to Microsoft’s current and future products as
and services to increase by 4.6 percent to $3.4 trillion well as its business strategy. Microsoft Azure has
this year. Growth is seen in all major segments, been released and addresses many needs and
including computer hardware and software, as well as concerns of the cloud computing market.
technology services and telecommunications. (v) (+) Microsoft is the world’s largest supplier of
operating systems for servers. As the demand for
cloud computing grows the increased need for
more servers will play well to Microsoft’s strength
CATALYSTS FOR GROWTH in offering secure and supported operating
systems.
Catalysts for growth include an economic recovery to
put GDP and ultimately revenue back into the system to
provide consumers and businesses with the means to
purchase and take advantage of technology. A second
catalyst for growth is the desire of individuals and
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THE UNIVERSITY OF IOWA
Henry Fund Research Henry B. Tippie School of Management
INVESTMENT NEGATIVES company will likely have the vast majority of its R&D
staff working on cloud computing related topics by the
Apple’s iPhone and RIM’s Blackberry product end of the year, indicating the firm sees cloud as the
continue to maintain their market share, thereby next step in the progressing of computing technology.
keeping the Windows Mobile operating system out
of the mobile device market. This could prove to be If Bing is able to continue to gain search market share
critical if users begin to adopt mobile devices as the company will see revenue growth largely through
their primary form of web browsing and computer online advertising sales.
interaction.
However, if another company were to release an
Individuals and businesses do not see the need to operating system that was adopted by the masses or if
move to cloud computing and also find a cheaper mobile devices that do not run an MS platform become
alternative to Windows and productivity products the primary way individuals interact for business and
such as Office. pleasure then we would look to recommend a SELL.
Further, decreasing margins on Windows and other
A competitor creating a superior operation system at products would lead revenues to stagnate for a period
reasonable cost would significantly impact before beginning a gradual decline. Any sign of stalled
Microsoft’s bottom line. revenues or a material change in management would
lead us to also suggest a SELL.
VALUATION
We place a BUY recommendation on Microsoft with a
target range of $30-35. The company is currently
trading at $30.67. We believe the company not only
has the ability to move to the top end of the target price
range, but also is positioned to exceed the $35 mark
with creation of a well-received product or service, a
strong strategic acquisition or the ability to grab a target
market with an integrated mobile device.
In the current competitive tech environment, Microsoft’s
ability to keep the Windows operating system and the
Microsoft Office Suite as integral parts of businesses
and individuals computer needs is critical to the
continuation of its dominance in the tech world.
Microsoft has been investing heavily in the mobile
device market and the mobile tablet markets. If the
company is able to create a product with critical mass
demand it should exceed the $35 mark by grabbing
market share from products such as the iPhone, iPad
and Blackberry. The Kin One and Kin Two mobile
phones were just released and are target at the lifestyle
of the younger teens. Also, there are rumors of a tablet
style product named the “Courier” that many prove to
be a success. This is a lofty goal for the company, but
given the capital and strong R&D staff, the firm has the
potential to reshape the technology experience of
businesses and individuals.
Lastly, the acquisition of a company such as Akamai
Technologies could create synergies or lead to quickly
being a market player in internet traffic and data
management or cloud computing. Cloud computing is
an area that Microsoft has invested heavily. The
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Henry Fund Research Henry B. Tippie School of Management
REFERENCES
(i) Yahoo Finance
(ii) Microsoft 2009 Annual Report
(iii) ValueEngine.com
(iv) Mergent
(v) Bing posts its tenth consecutive search-share
gain and other Microsoft news bits,
http://blogs.zdnet.com/microsoft/?p=5855&
utm_source=feedburner&utm_medium=fee
d&utm_campaign=Feed%3A+ZDNetBlogs+
%28ZDNet+All+Blogs%29
(vi) Gartner expects 2010 technology spending to
grow 4.6 percent, AP, January 21, 2010,
http://blog.taragana.com/index.php/archive/
gartner-expects-2010-technology-
spending-to-grow-46-percent/
IMPORTANT DSCLAIMER
This report was created by a student(s) enrolled in the
Applied Securities Management (Henry Fund) program
at the University of Iowa’s Tippie School of
Management. The intent of these reports is to provide
potential employers and other interested parties an
example of the analytical skills, investment knowledge,
and communication abilities of Henry Fund students.
Henry Fund analysts are not registered investment
advisors, brokers or officially licensed financial
professionals. The investment opinion contained in this
report does not represent an offer or solicitation to buy
or sell any of the aforementioned securities. Unless
otherwise noted, facts and figures included in this report
are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa,
its faculty, staff, students, or the Henry Fund may hold a
financial interest in the companies mentioned in this
report.
8
Microsoft Corporation
Segment Revenue and Operating Income (Loss)
(In millions)
By Business Setment:
Revenue Historical Forecast
2007 2008 2009 2010E 2011E 2012E 2013E CV
Client 14,972 16,865 14,712 18,114 19,382 21,126 23,028 23,719
Server and Tools 11,175 13,102 14,126 14,347 15,351 16,733 18,239 18,786
Online Services Business 2,474 3,214 3,088 3,391 3,629 3,955 4,311 4,441
Microsoft Business Division 16,396 18,929 18,894 19,745 21,127 23,029 25,101 25,854
Entertainment and Devices Division 6,083 8,206 7,753 6,930 7,415 8,083 8,809 9,074
Unallocated and other 22 104 -136 - - - - -
Consolidated 51,122 60,420 58,437 62,528 66,905 72,926 79,489 81,874
Revenue (% increase from PY) Historical Forecast Averages
2007 2008 2009 2010E 2011E 2012E 2013E CV Average (2004-CV) Average (2004-2009)
Client 14.4% 12.6% -12.8% 23.1% 7.0% 9.0% 9.0% 3.0% 9.3% 8.5%
Server and Tools 15.8% 17.2% 7.8% 1.6% 7.0% 9.0% 9.0% 3.0% 9.0% 11.7%
Online Services Business 7.6% 29.9% -3.9% 9.8% 7.0% 9.0% 9.0% 3.0% 9.3% 10.7%
Microsoft Business Division 13.2% 15.4% -0.2% 4.5% 7.0% 9.0% 9.0% 3.0% 9.0% 11.1%
Entertainment and Devices Division 27.9% 34.9% -5.5% -10.6% 7.0% 9.0% 9.0% 3.0% 10.1% 15.6%
Unallocated and other 0.0% 372.7% -230.8% -100.0% NA NA NA NA 6.0% 23.7%
Consolidated 15.4% 18.2% -3.3% 7.0% 7.0% 9.0% 9.0% 3.0% 52.7% 81.3%
Revenue as a % of Total Historical Forecast Averages
2007 2008 2009 2010E 2011E 2012E 2013E CV Average (2004-CV) Average (2004-2009)
Client 29.3% 27.9% 25.2% 31.0% 33.2% 36.2% 39.4% 40.6% 32.2% 29.0%
Server and Tools 21.9% 21.7% 24.2% 24.6% 26.3% 28.6% 31.2% 32.1% 25.5% 22.9%
Online Services Business 4.8% 5.3% 5.3% 5.8% 6.2% 6.8% 7.4% 7.6% 6.0% 5.4%
Microsoft Business Division 32.1% 31.3% 32.3% 33.8% 36.2% 39.4% 43.0% 44.2% 35.1% 31.6%
Entertainment and Devices Division 11.9% 13.6% 13.3% 11.9% 12.7% 13.8% 15.1% 15.5% 12.3% 11.1%
Unallocated and other 0.0% 0.2% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Consolidated 100.0% 100.0% 100.0% 107.0% 114.5% 124.8% 136.0% 140.1% 111.1% 100.0%
Operating Income (Loss) Historical Forecast
2007 2008 2009 2010E 2011E 2012E 2013E CV
Client 11,603 13,105 10,856 14,863 16,647 18,644 20,882 23,387
Server and Tools 3,900 4,539 5,327 4,169 4,669 5,230 5,857 6,560
Online Services Business -732 -1,222 -2,253 -638 -714 -800 -896 -1,004
Microsoft Business Division 10,838 12,369 12,141 13,662 15,301 17,137 19,194 21,497
Entertainment and Devices Division -1,892 497 169 -1,206 -1,351 -1,513 -1,694 -1,898
Corporate-level activity -5,193 -7,017 -5,877 -8,044 -9,009 -10,090 -11,301 -12,657
Consolidated 18,524 22,271 20,363 22,807 25,543 28,609 32,042 35,887
Operating Income (Loss) (% increase from PY) Historical Forecast Averages
2007 2008 2009 2010E 2011E 2012E 2013E CV Average (2004-CV) Average (2004-2009)
Client 12.7% 12.9% -17.2% 36.9% 12.0% 12.0% 12.0% 12.0% 10.3% 4.7%
Server and Tools 28.5% 16.4% 17.4% -21.7% 12.0% 12.0% 12.0% 12.0% 301.2% 547.8%
Online Services Business 889.2% 66.9% 84.4% -71.7% 12.0% 12.0% 12.0% 12.0% 91.5% 171.7%
Microsoft Business Division 12.7% 14.1% -1.8% 12.5% 12.0% 12.0% 12.0% 12.0% 10.0% 8.2%
Entertainment and Devices Division 47.4% -126.3% -66.0% -813.6% 12.0% 12.0% 12.0% 12.0% -66.5% 5.6%
Corporate-level activity 1.4% 35.1% -16.2% 36.9% 12.0% 12.0% 12.0% 12.0% 10.8% 5.6%
Consolidated 12.5% 20.2% -8.6% 12.0% 12.0% 12.0% 12.0% 12.0% 357.2% 743.7%
Operating Income (Loss) as a % of Total Historical Forecast Averages
2007 2008 2009 2010E 2011E 2012E 2013E CV Average (2004-CV) Average (2004-2009)
Client 62.6% 58.8% 53.3% 73.0% 81.7% 91.6% 102.5% 114.9% 77.7% 65.2%
Server and Tools 21.1% 20.4% 26.2% 20.5% 22.9% 25.7% 28.8% 32.2% 21.8% 18.3%
Online Services Business -4.0% -5.5% -11.1% -3.1% -3.5% -3.9% -4.4% -4.9% -3.3% -2.8%
Microsoft Business Division 58.5% 55.5% 59.6% 67.1% 75.1% 84.2% 94.3% 105.6% 71.4% 59.9%
Entertainment and Devices Division -10.2% 2.2% 0.8% -5.9% -6.6% -7.4% -8.3% -9.3% -6.3% -5.3%
Corporate-level activity -28.0% -31.5% -28.9% -39.5% -44.2% -49.6% -55.5% -62.2% -42.1% -35.3%
Consolidated 100.0% 100.0% 100.0% 112.0% 125.4% 140.5% 157.4% 176.2% 119.2% 100.0%
Geographic Analysis:
Revenue Historical Forecast
2007 2008 2009 2010E 2011E 2012E 2013E CV
United States 31,346 35,928 33,052 39,622 42,396 46,211 50,370 51,881
Other Countries 19,776 24,492 25,385 22,905 24,509 26,715 29,119 29,993
Total 51,122 60,420 58,437 62,528 66,905 72,926 79,489 81,874
Revenue (% increase from PY) Historical Forecast Averages
2007 2008 2009 2010E 2011E 2012E 2013E CV Average (2004-CV) Average (2004-2009)
United States 5.4% 14.6% -8.0% 19.9% 7.0% 9.0% 9.0% 3.0% 8.3% 7.2%
Other Countries 35.9% 23.8% 3.6% -9.8% 7.0% 9.0% 9.0% 3.0% 11.0% 17.1%
Total 15.4% 18.2% -3.3% 7.0% 7.0% 9.0% 9.0% 3.0% 19.3% 24.3%
Rev
Microsoft Corporation
Historical Forecast
As Reported Annual Income Stmt (FY-End at 6/30) (millions) 2007 2008 2009 2010E 2011E 2012E 2013E CV
Revenue by Business Segment
Client 14,972 16,865 14,712 18,114 19,382 21,126 23,028 23,719
Server and Tools 11,175 13,102 14,126 14,347 15,351 16,733 18,239 18,786
Online Services Business 2,474 3,214 3,088 3,391 3,629 3,955 4,311 4,441
Microsoft Business Division 16,396 18,929 18,894 19,745 21,127 23,029 25,101 25,854
Entertainment and Devices Division 6,083 8,206 7,753 6,930 7,415 8,083 8,809 9,074
Unallocated and other 22 104 -136 - - - - -
Revenue (Total) 51,122 60,420 58,437 62,527 66,904 72,926 79,489 81,873
% Growth 15.4% 18.2% -3.3% 7.0% 7.0% 9.0% 9.0% 3.0%
Cost of revenue 10,693 11,598 12,155 12,505 13,381 14,585 15,898 16,375
% of Revenue 20.9% 19.2% 20.8% 20.0% 20.0% 20.0% 20.0% 20.0%
Gross Profit 40,429 48,822 46,282 50,022 53,524 58,341 63,591 65,499
Gross Margin 79.1% 80.8% 79.2% 80.0% 80.0% 80.0% 80.0% 80.0%
Research & development expense 7,121 8,164 9,010 12,505 13,381 14,585 15,898 16,375
% of Revenue 13.9% 13.5% 15.4% 20.0% 20.0% 20.0% 20.0% 20.0%
Sales & marketing expense 11,455 13,039 12,879 13,756 14,719 16,044 17,487 18,012
% of Revenue 22.4% 21.6% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%
General & administrative expense 3,329 5,127 3,700 5,315 5,687 6,199 6,757 6,959
% of Revenue 6.5% 8.5% 6.3% 8.5% 8.5% 8.5% 8.5% 8.5%
Employee severance - - 330 - - - - -
% of Revenue 0.0% 0.0% 2.7% 0.0% 0.0% 0.0% 0.0% 0.0%
Other expenses - - - - - - - -
% of Revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total operating expenses 32,598 37,928 38,074 44,082 47,168 51,413 56,039 57,721
% of Revenue 63.8% 62.8% 65.2% 70.5% 70.5% 70.5% 70.5% 70.5%
Operating income (loss) (EBIT) 18,524 22,492 20,363 18,446 19,737 21,513 23,449 24,153
Operating Margin 36.2% 37.2% 34.8% 29.5% 29.5% 29.5% 29.5% 29.5%
Investment income (loss) & other 1,577 1,322 -542 1350 1350 1350 1350 1350
Income (loss) before income taxes 20,101 23,814 19,821 19,796 21,087 22,863 24,799 25,503
Provision (benefit) for income taxes 6,036 6,133 5,252 5,246 5,588 6,059 6,572 6,758
Income (loss) before accounting change 14,065 17,681 14,569 14,550 15,499 16,804 18,227 18,744
Net income (loss) 14,065 17,681 14,569 14,550 15,499 16,804 18,227 18,744
% of Revenue 27.5% 29.3% 24.9% 23.3% 23.2% 23.0% 22.9% 22.9%
Dividends -3,805 -4,015 -4,468 -4,562 -4,653 -4,746 -4,841 -4,938
Dividends per share 0.39 0.43 0.50 0.50 0.50 0.50 0.50 0.50
Weighted average shares outstanding - basic 9,742 9,328 8,945 9,124 9,306 9,493 9,682 9,876
Net earnings (loss) per share-basic 1.44 1.90 1.63 1.59 1.67 1.77 1.88 1.90
IS
Microsoft Corporation
Historical Forecast
As Reported Annual Balance Sheet (FY-End at 6/30) (millions) 2007 2008 2009 2010E 2011E 2012E 2013E CV
Cash & cash equivalents 6,111 10,339 6,076 6,253 6,690 7,293 7,949 8,187
Short-term investments 17,300 13,323 25,371 28,137 30,107 32,817 35,770 36,843
Total cash, cash equivalents, & short-term investments 23,411 23,662 31,447 34,390 36,797 40,109 43,719 45,030
Accounts receivable, gross 11,455 13,742 11,643 12,505 13,381 14,585 15,898 16,375
Less: allowance for doubtful accounts 117 153 451 188 201 219 238 246
Accounts receivable, net 11,338 13,589 11,192 12,318 13,180 14,366 15,659 16,129
Inventories 1127 985 717 713 710 706 703 699
Deferred income taxes 1,899 2,017 2,213 1,438 935 608 395 257
Other current assets 2,393 2,989 3,711 3,126 3,345 3,646 3,974 4,094
Total current assets 40,168 43,242 49,280 51,986 54,968 59,436 64,450 66,209
Land 428 518 526 729 833 937 1,040 1,144
Buildings & improvements 3,170 4,302 5,886 5,900 6,739 7,578 8,417 9,256
Leasehold improvments 1,077 1,728 1,938 1,654 1,889 2,124 2,359 2,594
Computer equipment & software 3,458 4,475 4,989 6,777 7,740 8,704 9,667 10,631
Furniture & equipment 1,233 1,521 1,743 2,522 2,881 3,239 3,598 3,957
Property & equipment, at cost 9,366 12,544 15,082 17,582 20,082 22,582 25,082 27,582
Less: accumulated depreciation 5,016 6,302 7,547 8,791 10,041 11,291 12,541 13,791
Property & equipment, net 4,350 6,242 7,535 8,791 10,041 11,291 12,541 13,791
Equity & other investments 10,117 6,588 4,933 4,933 4,933 4,933 4,933 4,933
Goodwill 4,760 12,108 12,503 12,503 12,503 12,503 12,503 12,503
Intangible assets, net 878 1,973 1,759 1,876 2,007 2,188 2,385 2,456
Deferred income taxes 1,389 949 279 181 118 77 50 32
Other long-term assets 1,509 1,691 1,599 1,876 2,007 2,188 2,385 2,456
Total assets 63,171 72,793 77,888 82,146 86,577 92,615 99,246 102,381
Accounts payable 3,247 4,034 3,324 3,126 3,345 3,646 3,974 4,094
Short-term debt - - 2,000 - - - - -
Accrued compensation 2,325 2,934 3,156 3,126 3,345 3,646 3,974 4,094
Income taxes 1,040 3,248 725 313 335 365 397 409
Short-term unearned revenue 10,779 13,397 13,003 13,131 14,050 15,314 16,693 17,193
Securities lending payable 2,741 2,614 1,684 1,876 2,007 2,188 2,385 2,456
Other current liabilities 3,622 3,659 3,142 3,126 3,345 3,646 3,974 4,094
Total current liabilities 23,754 29,886 27,034 24,698 26,427 28,806 31,398 32,340
Notes - - 3,750 3,750 3,750 3,750 3,750 1,875
Unamortized debt discount - - -4 - - - - -
Long-term debt - - 3,746 3,750 3,750 3,750 3,750 1,875
Long-term unearned revenue 1,867 1,900 1,281 1,251 1,338 1,459 1,590 1,637
Tax contingencies & other tax liabilities 5,071 3,812 5,515 5,627 6,021 6,563 7,154 7,369
Legal contingencies 778 530 407 625 669 729 795 819
Product warranty 487 278 132 313 335 365 397 409
Other long-term liabilities 117 101 215 313 335 365 397 409
Other long-term liabilities 6,453 4,721 6,269 6,878 7,359 8,022 8,744 9,006
Common stock & paid-in capital 60,557 62,849 62,382 58,406 49,693 40,511 30,311 20,262
Retained earnings (accumulated deficit) -29,460 -26,563 -22,824 -12,836 -1,991 10,068 23,454 37,260
Total stockholders' equity 31,097 36,286 39,558 45,569 47,702 50,579 53,765 57,522
Total liabilities & stockholders' equity 63,171 72,793 77,888 82,146 86,577 92,615 99,246 102,381
BS
Microsoft Corporation
Historical Forecast
As Reported Annual Cash Flow (FY-End at 6/30) (millions) 2007 2008 2009 2010E 2011E 2012E 2013E CV
Net income (loss) 14,065 17,681 14,569 14,550 15,499 16,804 18,227 18,744
Cumulative effect of accounting chng, net tax - - - - - - - -
Depreciation, amort, & other noncash items 1,440 2,056 2,562 1,244 1,250 1,250 1,250 1,250
Stock-based compensation 1,550 1,479 1,708 1,372 2,646 2,348 2,123 1,704
Net recognized (gains) losses on investments -292 -572 683 - - - - -
Excess tax benefits from stock-based payment arrangements -77 -120 -52 -30 219 301 328 119
Deferred income taxes 421 935 762 -872 -567 -369 -240 -156
Change in unearned revenue 1,650 2,588 -1,017 97 1,007 1,385 1,509 548
Accounts receivable -1,764 -1,569 2,215 -862 -875 -1,204 -1,313 -477
Allowance for doubtful accounts - - - -263 13 18 20 7
Other current assets 232 153 -422 588 -215 -298 -325 -116
Other long-term assets -435 -98 -273 -277 -131 -181 -197 -72
Other current liabilities -552 -748 -3,371 -626 460 632 689 250
Other long-term liabilities 1,558 -173 1,673 609 481 662 722 262
Net cash flows from operating activities 17,796 21,612 19,037 15,530 19,786 21,350 22,795 22,067
Short-term borrowings, maturities of 90 days or less, net - - 1,178 0 0 0 0 0
Proceeds from issuance of debt, maturities longer than 90 days - - 4,796 - - - - -
Repayments of debt, maturities longer than 90 days - - -228 4 0 0 0 -1875
Change in common stock -20,793 -9,039 -8,774 -3,976 -8,713 -9,181 -10,200 -10,049
Common stock cash dividends -3,805 -4,015 -4,468 -4,562 -4,653 -4,746 -4,841 -4,938
Excess tax benefits from stock-based payment arrangements 77 120 52 - - - - -
Other financing activities, net -23 - -19 - - - - -
Net cash flows from financing activities -24,544 -12,934 -7,463 -8,534 -13,366 -13,927 -15,042 -16,862
Additions to property & equipment -2,264 -3,182 -3,119 -3,744 -3,750 -3,750 -3,750 -3,750
Change in investments 8,729 -1,278 -11,721 -2,766 -1,970 -2,710 -2,953 -1,073
Change in intangible assets - - - -117 -131 -181 -197 -72
Securities lending payable -376 -127 -930 -192 -131 -181 -197 -72
Net cash flows from investing activities 6,089 -4,587 -15,770 -6,819 -5,982 -6,821 -7,097 -4,966
Effect of exch rates on cash & cash equivalents 56 137 -67 - - - - -
Net change in cash & cash equivalents -603 4,228 -4,263 177 438 602 656 238
Cash & cash equivalents, beginning of period 6,714 6,111 10,339 6,076 6,253 6,690 7,293 7,949
Cash & cash equivalents, end of period 6,111 10,339 6,076 6,253 6,690 7,293 7,949 8,187
CF
Microsoft Corporation
Historical Forecast
As Reported Annual Income Stmt (FY-End at 6/30) (millions) 2007 2008 2009 2010E 2011E 2012E 2013E CV
Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of revenue 20.92% 19.20% 20.80% 20.00% 20.00% 20.00% 20.00% 20.00%
Gross Profit 79.08% 80.80% 79.20% 80.00% 80.00% 80.00% 80.00% 80.00%
Research & development expense 13.93% 13.51% 15.42% 20.00% 20.00% 20.00% 20.00% 20.00%
Sales & marketing expense 22.41% 21.58% 22.04% 22.00% 22.00% 22.00% 22.00% 22.00%
General & administrative expense 6.51% 8.49% 6.33% 8.50% 8.50% 8.50% 8.50% 8.50%
Employee severance 0.00% 0.00% 0.56% 0.00% 0.00% 0.00% 0.00% 0.00%
Other expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total operating expenses 63.77% 62.77% 65.15% 70.50% 70.50% 70.50% 70.50% 70.50%
Operating income (loss) (EBIT) 36.23% 37.23% 34.85% 29.50% 29.50% 29.50% 29.50% 29.50%
Earnings (losses) on equity investees & other 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Investment income (loss) & other 3.08% 2.19% -0.93% 2.16% 2.02% 1.85% 1.70% 1.65%
Gain on sales 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Income (loss) before income taxes 39.32% 39.41% 33.92% 31.66% 31.52% 31.35% 31.20% 31.15%
Provision (benefit) for income taxes 11.81% 10.15% 8.99% 8.39% 8.35% 8.31% 8.27% 8.25%
Income (loss) before accounting change 27.51% 29.26% 24.93% 23.27% 23.17% 23.04% 22.93% 22.89%
Cumulative effect of accounting change, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net income (loss) 27.51% 29.26% 24.93% 23.27% 23.17% 23.04% 22.93% 22.89%
CS_IS
Microsoft Corporation
Historical Forecast
As Reported Annual Balance Sheet (FY-End at 6/30) (millions) 2007 2008 2009 2010E 2011E 2012E 2013E CV
Cash & cash equivalents 11.95% 17.11% 10.40% 10.00% 10.00% 10.00% 10.00% 10.00%
Short-term investments 33.84% 22.05% 43.42% 45.00% 45.00% 45.00% 45.00% 45.00%
Total cash, cash equivalents, & short-term investments 45.79% 39.16% 53.81% 55.00% 55.00% 55.00% 55.00% 55.00%
Accounts receivable, gross 22.41% 22.74% 19.92% 20.00% 20.00% 20.00% 20.00% 20.00%
Less: allowance for doubtful accounts 0.23% 0.25% 0.77% 0.30% 0.30% 0.30% 0.30% 0.30%
Accounts receivable, net 22.18% 22.49% 19.15% 19.70% 19.70% 19.70% 19.70% 19.70%
Inventories 2.20% 1.63% 1.23% 1.14% 1.06% 0.97% 0.88% 0.85%
Deferred income taxes 3.71% 3.34% 3.79% 2.30% 1.40% 0.83% 0.50% 0.31%
Other current assets 4.68% 4.95% 6.35% 5.00% 5.00% 5.00% 5.00% 5.00%
Total current assets 78.57% 71.57% 84.33% 83.14% 82.16% 81.50% 81.08% 80.87%
Land 0.84% 0.86% 0.90% 1.17% 1.25% 1.28% 1.31% 1.40%
Buildings & improvements 6.20% 7.12% 10.07% 9.44% 10.07% 10.39% 10.59% 11.31%
Leasehold improvments 2.11% 2.86% 3.32% 2.64% 2.82% 2.91% 2.97% 3.17%
Computer equipment & software 6.76% 7.41% 8.54% 10.84% 11.57% 11.93% 12.16% 12.98%
Furniture & equipment 2.41% 2.52% 2.98% 4.03% 4.31% 4.44% 4.53% 4.83%
Property & equipment, at cost 18.32% 20.76% 25.81% 28.12% 30.02% 30.97% 31.55% 33.69%
Less: accumulated depreciation 9.81% 10.43% 12.91% 14.06% 15.01% 15.48% 15.78% 16.84%
Property & equipment, net 8.51% 10.33% 12.89% 14.06% 15.01% 15.48% 15.78% 16.84%
Equity & other investments 19.79% 10.90% 8.44% 7.89% 7.37% 6.76% 6.21% 6.03%
Goodwill 9.31% 20.04% 21.40% 20.00% 18.69% 17.14% 15.73% 15.27%
Intangible assets, net 1.72% 3.27% 3.01% 3.00% 3.00% 3.00% 3.00% 3.00%
Deferred income taxes 2.72% 1.57% 0.48% 0.29% 0.18% 0.11% 0.06% 0.04%
Other long-term assets 2.95% 2.80% 2.74% 3.00% 3.00% 3.00% 3.00% 3.00%
Total assets 123.57% 120.48% 133.29% 131.38% 129.40% 127.00% 124.86% 125.05%
Accounts payable 6.35% 6.68% 5.69% 5.00% 5.00% 5.00% 5.00% 5.00%
Short-term debt 0.00% 0.00% 3.42% 0.00% 0.00% 0.00% 0.00% 0.00%
Accrued compensation 4.55% 4.86% 5.40% 5.00% 5.00% 5.00% 5.00% 5.00%
Income taxes 2.03% 5.38% 1.24% 0.50% 0.50% 0.50% 0.50% 0.50%
Short-term unearned revenue 21.08% 22.17% 22.25% 21.00% 21.00% 21.00% 21.00% 21.00%
Securities lending payable 5.36% 4.33% 2.88% 3.00% 3.00% 3.00% 3.00% 3.00%
Other current liabilities 7.09% 6.06% 5.38% 5.00% 5.00% 5.00% 5.00% 5.00%
Total current liabilities 46.47% 49.46% 46.26% 39.50% 39.50% 39.50% 39.50% 39.50%
Notes 0.00% 0.00% 6.42% 6.00% 5.61% 5.14% 4.72% 0.02
Unamortized debt discount 0.00% 0.00% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term debt 0.00% 0.00% 6.41% 6.00% 5.61% 5.14% 4.72% 2.29%
Long-term unearned revenue 3.65% 3.14% 2.19% 2.00% 2.00% 2.00% 2.00% 2.00%
Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Tax contingencies & other tax liabilities 9.92% 6.31% 9.44% 9.00% 9.00% 9.00% 9.00% 9.00%
Legal contingencies 1.52% 0.88% 0.70% 1.00% 1.00% 1.00% 1.00% 1.00%
Product warranty 0.95% 0.46% 0.23% 0.50% 0.50% 0.50% 0.50% 0.50%
Other long-term liabilities 0.23% 0.17% 0.37% 0.50% 0.50% 0.50% 0.50% 0.50%
Other long-term liabilities 12.62% 7.81% 10.73% 11.00% 11.00% 11.00% 11.00% 11.00%
Common stock & paid-in capital 118.46% 104.02% 106.75% 93.41% 74.27% 55.55% 38.13% 24.75%
Retained earnings (accumulated deficit) -57.63% -43.96% -39.06% -20.53% -2.98% 13.81% 29.51% 45.51%
Total stockholders' equity 60.83% 60.06% 67.69% 72.88% 71.30% 69.36% 67.64% 70.26%
Total liabilities & stockholders' equity 123.57% 120.48% 133.29% 131.38% 129.40% 127.00% 124.86% 125.05%
CS_BS
NOPLAT (Net Operating Profits Less Adjusted Taxes)
(in millions)
Marginal Tax Rate
26.5% Historical Forecast
2007 2008 2009 2010E 2011E 2012E 2013E CV
Revenues 51,122 60,420 58,437 62,527 66,904 72,926 79,489 81,873
- Cost of revenues 10,693 11,598 12,155 12,505 13,381 14,585 15,898 16,375
- Research & development expenses 7,121 8,164 9,010 12,505 13,381 14,585 15,898 16,375
- Sales & marketing expenses 11,455 13,039 12,879 13,756 14,719 16,044 17,487 18,012
- General & administrative expenses 3,329 5,127 4,030 5,315 5,687 6,199 6,757 6,959
- Other Expenses 0 0 0 0 0 0 0 0
EBITA 18,524 22,492 20,363 18,446 19,737 21,513 23,449 24,153
Provision (benefit) for income taxes 6,036 6,133 5,252 5,246 5,588 6,059 6,572 6,758
+ Tax shield on interest expense - - - - - - - -
- Tax on interest income - - - - - - - -
+ Tax shield on amortized goodwill - - - - - - - -
- Tax shield on gain (loss) on investment income 418 350 (144) 358 358 358 358 358
- Tax shield on non-operating income - - - - - - - -
+ Tax shield on non-operating losses - - - - - - - -
Adjusted Taxes 5,618 5,783 5,396 4,888 5,230 5,701 6,214 6,400
Change in deferred taxes 1,181 558 866 -677 -440 -286 -186 -121
NOPLAT 14,087 17,267 15,833 12,881 14,067 15,526 17,049 17,631
Invested Capital (IC)
Operating Current Assets (CA)
+ Normal cash (2% of sales) 122 207 122 125 134 146 159 164
+ Accounts receivable 11,338 13,589 11,192 12,318 13,180 14,366 15,659 16,129
+ Inventory 1,127 985 717 713 710 706 703 699
+ Prepaid expenses & Other current operating assets 2,393 2,989 3,711 3,126 3,345 3,646 3,974 4,094
Operating Current Assets 14,980 17,770 15,742 16,283 17,369 18,865 20,495 21,086
Non-Interest Bearing Current Liabilities (CL)
+ Accounts payable 3,247 4,034 3,324 3,126 3,345 3,646 3,974 4,094
+ Accrued expenses 2,325 2,934 3,156 3,126 3,345 3,646 3,974 4,094
+Deferred revenue 10,779 13,397 13,003 13,131 14,050 15,314 16,693 17,193
+ Taxes payable 1040 3248 725 312.6371 334.5224 364.63032 397.44295 409.36668
+ Other current liabilities 3,622 3,659 3,142 3,126 3,345 3,646 3,974 4,094
Operating Current Liabilities 21,013 27,272 23,350 22,823 24,420 26,618 29,013 29,884
Net Operating Working Capital (6,033) (9,502) (7,608) (6,540) (7,051) (7,753) (8,518) (8,798)
+ Net PPE 4,350 6,242 7,535 8,791 10,041 11,291 12,541 13,791
+ Net Other Operating Assets 2,387 3,664 3,358 3,752 4,014 4,376 4,769 4,912
+ Present value of operating leases 1,176 1,888 2,040 2,240 2,440 2,640 2,840 3,040
Total Other Operating Assets 7,913 11,794 12,933 14,783 16,496 18,307 20,151 21,744
- Deferred revenue (long-term) 1,867 1,900 1,281 1,251 1,338 1,459 1,590 1,637
- Other liabilities (long-term) 6,453 4,721 6,269 6,878 7,359 8,022 8,744 9,006
Total Other Operating Liabilities 8,320 6,621 7,550 8,129 8,698 9,480 10,334 10,644
Invested Capital 10,201 8,912 12,875 16,372 18,142 20,034 21,966 23,589
NOPLAT 14,087 17,267 15,833 12,881 14,067 15,526 17,049 17,631
Beginning invested capital 6,434 10,201 8,912 12,875 16,372 18,142 20,034 21,966
Return on Invested Capital (ROIC) 218.94% 169.28% 177.66% 100.04% 85.92% 85.58% 85.10% 80.27%
NOPLAT 14,087 17,267 15,833 12,881 14,067 15,526 17,049 17,631
Change in invested capital 3,766 (1,288) 3,963 3,497 1,770 1,892 1,932 1,623
Free Cash Flow (FCF) 10,321 18,556 11,871 9,384 12,296 13,634 15,117 16,008
Beginning Invested capital 6,434 10,201 8,912 12,875 16,372 18,142 20,034 21,966
Return on invested capital (ROIC) 218.94% 169.28% 177.66% 100.04% 85.92% 85.58% 85.10% 80.27%
WACC 7.39% 7.39% 7.39% 7.39% 7.39% 7.39% 7.39% 7.39%
Economic Profit (EP) 13,611 16,513 15,174 11,929 12,856 14,185 15,568 16,007
Drivers
Microsoft Corporation
WACC Calculation
Equity 250,726
Risk-free rate 4.72%
Market Risk Premium 4.50%
Beta 0.94
Cost of Equity 7.50%
Debt 5,750
Cost of Debt 5.20%
Effective Tax Rate 26.50%
After-tax cost of debt 3.82%
Debt to Equity Ratio: 0.02
WACC = w(e)*r(e) + w(d)*r(d)*(1-t) 7.39%
Terminal Growth Rate 3.00%
WACC
Microsoft Corporation
WACC 7.39% Equity 250,726
CV Growth Rate 3.00% Risk-free rate 4.72%
CV ROIC 80.27% Market Risk Premium 4.50%
Cost of Equity 7.50% Beta 0.94
Cost of Equity 7.50%
Forecast Debt 5,750
2010E 2011E 2012E 2013E CV Cost of Debt 5.2%
Discounted Cash Flow Model Effective Tax Rate 26.50%
NOPLAT 12,881 14,067 15,526 17,049 17,631 After-tax cost of debt 3.82%
Change in invested capital 3,497 1,770 1,892 1,932 1,623 Debt to Equity Ratio: 0.02
Free Cash Flow (FCF) 9,384 12,296 13,634 15,117 16,008 WACC = w(e)*r(e) + w(d)*r(d)*(1-t) 7.39%
Terminal Growth Rate 3.00%
CV FCF 386,189
PV of FCF 8,738 10,661 11,007 11,364 290,313
PV of FCF 332,083
- PV (Debt) 3,221
- PV (Leases) 2,040
- PV (ESOP) 1,729
+ PV (non-operating assets) -
PV (Equity) 325,092
Share Outstanding 9,876
Target Price 32.92 As of Last FY End (6/30/2009)
Target Price 34.93 As of 4/15/10 (growth at cost of capital)
Economic Profit (EP) Forecast
2010E 2011E 2012E 2013E CV
NOPLAT 12,881 14,067 15,526 17,049 17,631
Invested capital 12,875 16,372 18,142 20,034 21,966
Return on invested capital (ROIC) 100.04% 85.92% 85.58% 85.10% 80.27%
WACC 7.39% 7.39% 7.39% 7.39% 7.39%
Economic Profit (EP) 109,444 126,419 139,777 148,177 148,178
PV of EP 101,908 109,609 112,846 111,390 163,340
PV of EP 599,092
Invested Capital 67,423
PV (Operations) 666,516
- PV (Debt) 49,295
- PV (Leases) 121,975
- PV (ESOP) 170,161
+ PV (non-operating assets) -
PV (Equity) 325,084
Shares Outstanding 9,876
Target Price 32.92 As of Last FY End (6/30/2009)
Target Price 34.93 As of 4/15/10 (growth at cost of capital)
DCF_EP
Forecast
2010E 2011E 2012E 2013E CV
EPS 1.59 1.67 1.77 1.88 1.90
Key Assumptions
WACC 7.39%
CV Growth Rate 3.00%
CV ROE 32.59%
Cost of Equity 7.50%
Future Cash Flows
P/E Multiple 20.18
EPS (next period) 1.90
Stock Price 38.29
Dividends Per Share 0.50 0.50 0.50 0.50
Future Cash Flows 0.50 0.50 0.50 38.79
Discounted Cash Flows 0.47 0.43 0.40 29.16
Fundamental P/E Target 30.47 As of End of Last FY End
32.33 As of 4/15/10 (growth at cost of capital)
DDM
Relative Valuation:
Long-Term Net Profit Price to Free
1 Day Price Market Cap Dividend Debt to Price to Margin % Cash Flow
Ticker Description Change % (Billions) P/E ROE % Yield % Equity Book Value (mrq) (mrq) Price EPS (ttm) EPS 2010 EPS 2011 PE 2010 PE 2011
AAPL Apple Inc. -0.61 224.3 24.1 31.9 0 NA 6.27 21.54 57.13 247.4 10.27 12.00 14.00 20.62 17.67
GOOG Google Inc. -7.58 174.9 26.95 20.3 NA NA 4.86 29.58 97.33 550.15 20.41 28.00 32.00 19.65 17.19
IBM Intl. Business Machine... -0.2 169.7 13.05 74.37 1.7 NA 7.53 17.67 37.41 130.63 10.01 11.00 12.00 11.88 10.89
ORCL Oracle Corporation -0.95 130.2 23.19 21.97 0.8 NA 4.57 18.57 58.88 25.95 1.12 2.00 2.00 12.98 12.98
HPQ Hewlett-Packard Company -0.89 126 16.2 19.83 0.6 NA 3.03 7.22 109.47 53.75 3.32 4.45 4.91 12.08 10.95
YHOO Yahoo! Inc. -4.22 25.4B 43.06 5.04 NA NA 2 8.83 132.87 18.17 0.42 0.48 0.61 37.85 29.79
ADBE Adobe Systems Incorpor... -1.13 17.9B 50.59 7.3 0 NA 3.46 14.81 64.72 34 0.67 1.83 2.11 18.58 16.11
SYMC Symantec Corporation -1.77 13.4B 43.33 7.34 NA NA 3.04 19.38 36.36 16.68 0.39 1.47 1.56 11.35 10.69
CTXS Citrix Systems, Inc. -0.33 8.9B 46.92 9.3 NA NA 4.04 19.54 74.64 48.47 1.03 1.9 2.13 25.51 22.76
Peer Averages (1.96) 165.02 31.93 21.93 0.62 4.31 17.46 74.31 125.02 5.29 7.01 7.92 18.94 16.56
MSFT Microsoft Corporation -0.65 269.0B 16.9 41.28 1.7 NA 6.1 35.02 118.63 30.67 1.82 1.59 1.67 19.29 18.37
Target Price: PE 2010 $ 30.12
PE 2011 $ 27.65
PE
Microsoft Corporation
Historical Forecast
2007 2008 2009 2010E 2011E 2012E 2013E CV
Liquidity Ratios
Current Ratio: (Current Assets/Current Liab) 1.69 1.45 1.82 2.10 2.08 2.06 2.05 2.05
Quick Ratio (acid-test ratio):
(Cash & Equivalents + ST Invest + AR/ Curr Liab) 1.46 1.25 1.58 1.89 1.89 1.89 1.89 1.89
Activity Ratios
Receivables Turnover: (Sales/Avg AR) 4.95 4.85 4.72 5.32 5.25 5.29 5.29 5.15
Inventory Turnover: (COGS/Avg Inventory) 8.21 10.98 14.28 17.49 18.80 20.60 22.56 23.36
Asset Turnover: (Sales/Avg Total Assets) 0.77 0.89 0.78 0.78 0.79 0.81 0.83 0.81
Financial Leverage Ratios
Interest coverage: (EBIT/Interest) N/A N/A N/A N/A N/A N/A N/A N/A
EBITDA coverage: (EBITDA/Interest) N/A N/A N/A N/A N/A N/A N/A N/A
Debt to Equity: (Long-term debt/equity) - - 0.09 0.08 0.08 0.07 0.07 0.03
Debt to Assets: (ST & LT Debt/Total Assets) - - 0.07 0.05 0.04 0.04 0.04 0.02
Profitability Ratios
Gross Profit Margin: (Revenue-COGS)/Revenue 0.79 0.81 0.79 0.80 0.80 0.80 0.80 0.80
Return on Assets: (Net Income/Assets) 0.22 0.24 0.19 0.18 0.18 0.18 0.18 0.18
Payout Policy Ratios
Dividend Payout (Dividend/Net Income) 0.27 0.23 0.31 0.31 0.30 0.28 0.27 0.26
Ratios