MICROSOFT NOMURA OCT 11

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					Microsoft Corporation                                             MSFT.O MSFT US

AMERICAS TECHNOLOGY
                                                                                                              EQUITY RESEARCH
                                                                                                                            S



Another Stab at Gross Margins                                                                         October 26, 2011
                                                                                                      Relative rating
                                                                                                                                       Buy
Trimming Estimates on Gross                                                                           Remains

                                                                                                      Target price                 USD 32.00
Margin Assumptions
                                                                                                      Remains

                                                                                                      Closing price                USD 26.81
                                                                                                      October 25, 2011

                                                                                                      Potential upside               +19.4%


Fast Growth in Low GM Businesses                                                                      Research analysts
We are trimming our Microsoft estimates by 2% or $0.05 per share for
fiscal (June) 2012 and 2013 to reflect some adjustments to our gross                                  Americas Software
margin assumptions following the recently reported results. We had baked                              Rick Sherlund - NSI
into the model lower gross margins given that high-margin businesses like                             rick.sherlund@nomura.com
                                                                                                      +1 212 298 4077
Windows and Office are not growing much this year, while low-margin
                                                                                                      Frederick Grieb - NSI
businesses are faster growing. Recent follow-up comments from                                         frederick.grieb@nomura.com
management suggest that the Street may not have fully grasped the                                     +1 212 298 4124
extent of the impact of Skype, Yahoo traffic acquisition costs, head-count                            Ryan Lee - NSI
related expenses within the Server business from growing consulting                                   ryan.lee@nomura.com
                                                                                                      +1 212 298 4641
services, and third-party royalties within the Xbox business on the gross
                                                                                                      Andrew Heffer - NSI
margin. We characterize this as directionally consistent with our prior                               andrew.heffer@nomura.com
modeled assumptions, but of a higher magnitude.                                                       +1 212 667 1245


This is Not a Product Cycle Year
We have incorporated a 1% additional reduction in the gross margin for
this year and next (see Figures 1 and 2). Our revenue estimates remain
unchanged, and there is no change in our view that this is not a product
cycle year. Our favorable view of the stock is based on the anticipated
October 2012 launch of Windows 8 and an upgrade cycle for Windows 8
based Ultrabook Touch devices. We expect this to be followed by a
Windows 8 Metro (touch) interface version of Office within 1-3 quarters of
the Windows 8 launch.
Not A stock for Near-Term Gratification
The next year has little in the way of positive catalysts other than the
release to beta test of Windows 8, which we think may coincide with the
early January Consumer Electronics Show (CES), followed by the launch
of Windows 8 and Windows Server 8 in about a year. We expect the stock
to gain traction about six months ahead of the launch, possibly earlier with
the launch to beta test of Windows 8. There will be a number of new
Ultrabook notebooks (thin, light weight, longer battery life, and instant on)
shipping this quarter and in Q1, which may provide some incremental
upgrade demand in the PC sector, but most of the excitement we would
expect to be around the new generation of touch-based Ultrabooks that
ship along with Windows 8.


Fiscal Year end: June                     2 0 11A                  2 0 12 E                2 0 13 E
$ in millio ns, except per share data                    Old          New           Old       New

Revenue                                  $69,943    $74,850      $74,850        $83,138   $83,138
Operating Incom e                         27,161     28,297       27,761         31,721    31,143
                                                                                                      See Appendix A-1 for analyst
Operating Margin                          38.8%      37.8%         37.1%         38.2%     37.5%
                                                                                                      certification, important
EPS                                        $2.69      $2.74         $2.69         $3.15     $3.10     disclosures and the status of
Source: Company data, Nomura estimates                                                                non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | Microsoft Corporation                                                                                                                                                                       October 26, 2011



Key data on Microsoft Corporation
                                                                                                                                           Income Statement
Rating                                                                                                                                     Year end (June), mn except per share data    FY11A       FY12E      FY13E
Stock                                                                                                                               Buy    Revenues:
Sector                                                                                                                        Neutral       Window s & Window s Live Division          $19,023     $19,098   $21,440
                                                                                                                                            Server & Tools                              16,700      18,382     20,157
Relative performance chart                                                                                                                  Online Services Division                     2,529       2,975      3,455
                                                                                                                                            Microsoft Business Division                 22,582      23,698     25,757
                                               Price                                                                                        Entertainment & Devices Division             8,913      10,653     12,329
         (USD)                                 Rel S&P Software Industry Index                                                              Other revenues                                 196          44          0
                                                                                                                                            Total revenues                             $69,943     $74,850   $83,138
                                                                                                                                              % change year-on-year                     11.9%        7.0%      11.1%
    30                                                                                                                        105
                                                                                                                                           Operating Incom e                           $27,161     $27,761   $31,143
                                                                                                                                            % change year-on-year                       12.7%        2.2%      12.2%
    28                                                                                                                        100          Operating Margin                             38.8%       37.1%      37.5%
                                                                                                                                            % ∆ (bps)                                  27 bps     -174 bps    37 bps
    26                                                                                                                        95           Net Incom e                                 $23,150     $22,651   $25,669
                                                                                                                                            % change year-on-year                       23.4%       (2.2%)     13.3%
                                                                                                                                           EPS                                           $2.69       $2.69      $3.10
    24                                                                                                                        90
                                                                                                                                            % change year-on-year                       28.2%       (0.3%)     15.3%
                                                                                                                                           Shares O/S                                    8,593       8,436      8,291
    22                                                                                                                        85
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                                                                                                                                           Balance Sheet Metrics
                                                                                                                                           Year end (June), mn except per share data    FY11A       FY12E      FY13E
                                                                                                                                           Cash, Equivalents, & ST Investments         $52,772     $64,945   $81,404
                                                                                                                                           Long-term investments                       $10,865      $8,576     $8,576
Source: ThomsonReuters, Nomura research                                                                                                    Total Debt                                  $11,921     $11,927   $11,927
                                                                                                                                           Net Cash                                    $51,716     $61,594   $78,053
Performance                                                                                                                                Deferred Revenue                            $17,120     $18,354   $21,173
(%)                                                                           1M                           3M                       12M
Absolute                                                                      7.0                         -3.9                       6.4
                                                                                                                                           Cash Flow Metrics
Relative to sector                                                           -4.3                         -2.1                      -3.3
                                                                                                                                           Year end (June), mn except per share data    FY11A       FY12E      FY13E
                                                                                                                                           Operating Cash Flow                         $26,994     $26,723   $31,468
Market data
                                                                                                                                           Capital Expenditures                        ($2,355)   ($2,500)   ($2,285)
Market cap (m)                                                                                                              225,530.6
                                                                                                                                           Free Cash Flow                              $24,639     $24,223   $29,183
Shares outstanding (m)                                                                                                       8,412.18
                                                                                                                                            % change year-on-year                       11.5%       (1.7%)     20.5%
                                                                                                                                           Unlevered Free Cash Flow                    $24,162     $23,698   $28,429
                                                                                                                                            % change year-on-year                       12.0%       (1.9%)     20.0%
Source: ThomsonReuters, Nomura research
                                                                                                                                           Dividends                                    $5,180      $6,392     $7,960


                                                                                                                                           Valuation Metrics
                                                                                                                                           Year end (June), mn except per share data    FY11A       FY12E      FY13E
                                                                                                                                            Price to earnings                            10.0x       10.0x       8.7x
                                                                                                                                            Price to earnings less cash                   8.4x        8.5x       7.4x
                                                                                                                                            EV to uFCF                                    7.8x        8.0x       6.6x




                                                                                                                                                                                                                    2
Nomura | Microsoft Corporation                                                                          October 26, 2011



Another Stab at Gross Margins

Fig. 1: Gross Margin Quarterly Trend
%

    85.0%


    80.0%


    75.0%


    70.0%


    65.0%


    60.0%


    55.0%


    50.0%
                       Sep-Q                 Dec-Q                     Mar-Q               Jun-Q

            FY 2008a           FY 2009a      FY 2010a         FY 2011a         FY 2012e     FY 2013e


Source: Company data, Nomura estimates




Fig. 2: Gross Margin Annual Trend
%

    85.0%
                 80.8%
                                   79.2%         80.2%
    80.0%
                                                                    77.7%
                                                                                 75.4%
    75.0%                                                                                     74.6%



    70.0%


    65.0%


    60.0%


    55.0%


    50.0%
                FY 2008a          FY 2009a     FY 2010a         FY 2011a        FY 2012e     FY 2013e


                                                     Gross Margin

Source: Company data, Nomura estimates




                                                                                                                       3
                                                                                                                                                                                                                                                                         Nomura |
Fig. 3: Microsoft Statement of Profit & Loss
$ in millions, except per share data
                                                          FY 2011a                                       FY 2012e                                            FY 2013e                              Fiscal Year ending June                 Calendar Year




                                                                                                                                                                                                                                                                         Microsoft Corporation
    FY ending in June ($ millions)          sep         dec        mar         jun         sep        dec-e        mar-e        jun-e        sep-e        dec-e        mar-e        jun-e       FY 2011a    FY 2012e   FY 2013e    2010a        2011e        2012e
    Statement of Profit & Loss
    Revenue                               $ 16,195    $ 19,953    $ 16,428   $ 17,367    $ 17,372    $ 20,988     $ 17,773     $ 18,716     $ 18,454     $ 23,423     $ 19,682     $ 21,579     $ 69,943    $ 74,850   $ 83,138   $ 66,690     $ 72,155     $ 78,366
     % Change year-on-year                  25.3%        4.9%       13.3%       8.3%        7.3%        5.2%         8.2%         7.8%         6.2%        11.6%        10.7%        15.3%        11.9%        7.0%      11.1%      13.6%         8.2%         8.6%
     Cost of revenue                         3,139       4,833       3,897      3,708       3,777       5,663        4,579        4,357        4,275        6,552        5,131        5,198       15,577      18,376     21,155     13,897       17,045       19,763
      Cost of revenue as a % of revenue     19.4%       24.2%       23.7%      21.4%       21.7%       27.0%        25.8%        23.3%        23.2%        28.0%        26.1%        24.1%        22.3%       24.6%      25.4%      20.8%        23.6%        25.2%
     Gross profit                         $ 13,056    $ 15,120    $ 12,531   $ 13,659    $ 13,595    $ 15,325     $ 13,195     $ 14,359     $ 14,179     $ 16,871     $ 14,551     $ 16,382     $ 54,366    $ 56,473   $ 61,983   $ 52,793     $ 55,110     $ 58,603
     % Gross margin                        80.6%       75.8%       76.3%      78.6%       78.3%       73.0%        74.2%        76.7%        76.8%        72.0%        73.9%        75.9%         77.7%       75.4%      74.6%     79.2 %       76.4 %        74.8 %
    Operating expenses:
     Research and development              $ 2,196     $ 2,185     $ 2,269    $ 2,393     $ 2,329     $ 2,297      $ 2,453      $ 2,620      $ 2,574      $ 2,418      $ 2,524      $ 2,840      $ 9,043     $ 9,699   $ 10,357    $ 8,951      $ 9,288     $ 10,065
     Sales and marketing                     2,806       3,825       3,393      3,916       2,900       3,904        3,546        3,997        3,128        4,171        3,780        4,499       13,940      14,347     15,578     13,436       14,113       14,842
     General and administrative                938         945       1,160      1,179       1,163       1,075        1,228        1,200        1,200        1,106        1,260        1,340        4,222       4,666      4,905      4,022        4,577        4,733
     Other                                       -           -           -          -           -           -            -            -            -            -            -            -            -           -          -          -            -            -
      Operating expenses                   $ 5,940     $ 6,955     $ 6,822    $ 7,488     $ 6,392     $ 7,276      $ 7,227      $ 7,817      $ 6,901      $ 7,694      $ 7,565      $ 8,679     $ 27,205    $ 28,713   $ 30,840   $ 26,409     $ 27,978     $ 29,640
    Operating income                       $ 7,116     $ 8,165     $ 5,709    $ 6,171     $ 7,203     $ 8,049      $ 5,967      $ 6,542      $ 7,278      $ 9,176      $ 6,986      $ 7,702     $ 27,161    $ 27,761   $ 31,143   $ 26,384     $ 27,132     $ 28,963
      % Change year-on-year                 58.8%       (4.1%)      10.4%       4.1%        1.2%       (1.4%)        4.5%         6.0%         1.0%        14.0%        17.1%        17.7%        12.7%        2.2%      12.2%      23.2%         2.8%         6.7%
     % Operating margin                    43.9%       40.9%       34.8%      35.5%       41.5%       38.4%        33.6%        35.0%        39.4%        39.2%        35.5%        35.7%         38.8%       37.1%      37.5%     39.6%        37.6%        37.0%
    Dividends and interest                   $ 165       $ 133       $ 132      $ 148       $ 117       $ 172        $ 175        $ 194        $ 206        $ 236        $ 238        $ 263        $ 578       $ 658    $ 943        $ 666        $ 569        $ 811
    Other gains (losses)                       (51)        199         184          -         (14)          -            -            -            -            -            -            -          332         (14)       0           42          170            0
     Other income, net                       $ 114       $ 332       $ 316      $ 148       $ 103       $ 172        $ 175        $ 194        $ 206        $ 236        $ 238        $ 263        $ 910       $ 644    $ 943        $ 708        $ 739        $ 811
    Pre-tax income                         $ 7,230     $ 8,497     $ 6,025    $ 6,319     $ 7,306     $ 8,221      $ 6,142      $ 6,736      $ 7,484      $ 9,412      $ 7,225      $ 7,965     $ 28,071    $ 28,405 $ 32,086     $ 27,092     $ 27,871     $ 29,774
     % Pre-tax margin                       44.6%       42.6%       36.7%      36.4%       42.1%       39.2%        34.6%        36.0%        40.6%        40.2%        36.7%        36.9%        40.1%       37.9%    38.6%        40.6%        38.6%        38.0%
    Income taxes                           $ 1,820     $ 1,863      $ 793      $ 445      $ 1,568     $ 1,644      $ 1,228      $ 1,313      $ 1,497      $ 1,882      $ 1,445      $ 1,593      $ 4,921     $ 5,754    $ 6,417    $ 6,524      $ 4,450      $ 5,921
      % Tax rate                            25.2%       21.9%      13.2%       7.0%        21.5%       20.0%        20.0%        19.5%        20.0%        20.0%        20.0%        20.0%        17.5%       20.3%      20.0%      24.1%        16.0%        19.9%
    Net income                             $ 5,410     $ 6,634     $ 5,232    $ 5,874     $ 5,738     $ 6,577      $ 4,914      $ 5,422      $ 5,987      $ 7,530      $ 5,780      $ 6,372     $ 23,150    $ 22,651   $ 25,669   $ 20,568     $ 23,421     $ 23,853
    Unusual items                                 -           -      (461)           -           -            -            -            -            -            -            -            -       (461)          -          -            -            -            -
    Earnings per share                     $ 0.62       $ 0.77     $ 0.61     $ 0.69       $ 0.68      $ 0.78       $ 0.58       $ 0.65       $ 0.72      $ 0.91       $ 0.70       $ 0.77        $ 2.69      $ 2.69     $ 3.10    $ 2.35       $ 2.76        $ 2.85
     % Change year-on-year                 56.4%         4.0%      36.2%      34.6%         8.6%        0.5%        (5.1%)       (6.2%)        6.1%       16.5%        19.7%        19.6%         28.2%       (0.3%)     15.3%     29.4%        17.2%          3.4%
    Diluted shares                          8,695       8,570        8,510     8,521       8,490       8,454        8,418        8,382        8,346        8,309        8,273        8,237         8,593       8,436      8,291     8,741        8,494        8,364

Source: Company data, Nomura estimates




                                                                                                                                                                                                                                                                         October 26, 2011
4
                                                                                                                                                                                                                               Nomura |
Fig. 4: Microsoft Statement of Profit & Loss (continued)

                                                      FY 2011a                               FY 2012e                              FY 2013e                    Fiscal Year ending June               Calendar Year




                                                                                                                                                                                                                               Microsoft Corporation
    FY ending in June ($ millions)       sep       dec       mar       jun      sep       dec-e    mar-e     jun-e    sep-e     dec-e    mar-e     jun-e    FY 2011a   FY 2012e   FY 2013e   2010a      2011e        2012e
    Margin analysis / % Revenue
      Cost of revenue                    19.4%     24.2%     23.7%     21.4%    21.7%     27.0%     25.8%    23.3%    23.2%     28.0%     26.1%    24.1%      22.3%      24.6%      25.4%     20.8%      23.6%        25.2%
      Gross profit                       80.6%     75.8%     76.3%     78.6%    78.3%     73.0%     74.2%    76.7%    76.8%     72.0%     73.9%    75.9%      77.7%      75.4%      74.6%     79.2%      76.4%        74.8%
      Research and development           13.6%     11.0%     13.8%     13.8%    13.4%     10.9%     13.8%    14.0%    13.9%     10.3%     12.8%    13.2%      12.9%      13.0%      12.5%     13.4%      12.9%        12.8%
      Sales and marketing                17.3%     19.2%     20.7%     22.5%    16.7%     18.6%     20.0%    21.4%    16.9%     17.8%     19.2%    20.8%      19.9%      19.2%      18.7%     20.1%      19.6%        18.9%
      General and administrative          5.8%      4.7%      7.1%      6.8%     6.7%      5.1%      6.9%     6.4%     6.5%      4.7%      6.4%     6.2%       6.0%       6.2%       5.9%      6.0%       6.3%         6.0%
      Operating expenses                 36.7%     34.9%     41.5%     43.1%    36.8%     34.7%     40.7%    41.8%    37.4%     32.9%     38.4%    40.2%      38.9%      38.4%      37.1%     39.6%      38.8%        37.8%
      Operating income                   43.9%     40.9%     34.8%     35.5%    41.5%     38.4%     33.6%    35.0%    39.4%     39.2%     35.5%    35.7%      38.8%      37.1%      37.5%     39.6%      37.6%        37.0%
      Net income                         33.4%     33.2%     31.8%     33.8%    33.0%     31.3%     27.6%    29.0%    32.4%     32.1%     29.4%    29.5%      33.1%      30.3%      30.9%     30.8%      32.5%        30.4%
      Tax rate                           25.2%     21.9%     13.2%      7.0%    21.5%     20.0%     20.0%    19.5%    20.0%     20.0%     20.0%    20.0%      17.5%      20.3%      20.0%     24.1%      16.0%        19.9%
    % Growth, year-on-year
      Revenue                            25.3%       4.9%    13.3%      8.3%     7.3%      5.2%      8.2%     7.8%     6.2%     11.6%     10.7%    15.3%      11.9%       7.0%      11.1%     13.6%       8.2%         8.6%
      Cost of revenue                    10.5%      33.2%    41.5%     17.0%    20.3%     17.2%     17.5%    17.5%    13.2%     15.7%     12.1%    19.3%      25.7%      18.0%      15.1%     17.1%      22.7%        15.9%
      Research and development            6.3%       5.1%     2.2%      1.8%     6.1%      5.1%      8.1%     9.5%    10.5%      5.3%      2.9%     8.4%       3.8%       7.3%       6.8%      4.3%       3.8%         8.4%
      Sales and marketing                 0.6%       5.7%     5.9%      8.7%     3.3%      2.1%      4.5%     2.1%     7.8%      6.8%      6.6%    12.6%       5.5%       2.9%       8.6%      6.8%       5.0%         5.2%
      General and administrative         26.6%     (15.9%)    0.7%     19.5%    24.0%     13.8%      5.9%     1.8%     3.1%      2.8%      2.6%    11.7%       5.4%      10.5%       5.1%      4.5%      13.8%         3.4%
      Operating expenses                  6.1%       1.1%     3.8%      7.9%     7.6%      4.6%      5.9%     4.4%     8.0%      5.8%      4.7%    11.0%       4.7%       5.5%       7.4%      4.0%       5.9%         5.9%
      Operating income                   58.8%      (4.1%)   10.4%      4.1%     1.2%     (1.4%)     4.5%     6.0%     1.0%     14.0%     17.1%    17.7%      12.7%       2.2%      12.2%     23.2%       2.8%         6.7%
      Net income                         51.4%      (0.4%)   30.6%     30.0%     6.1%     (0.9%)    (6.1%)   (7.7%)    4.3%     14.5%     17.6%    17.5%      23.4%      (2.2%)     13.3%     26.5%      13.9%         1.8%
      Earnings per share                 56.4%       4.0%    36.2%     34.6%     8.6%      0.5%     (5.1%)   (6.2%)    6.1%     16.5%     19.7%    19.6%      28.2%      (0.3%)     15.3%     29.4%      17.2%         3.4%
      EPS - pro forma                    56.4%      (1.2%)   18.7%     31.8%     8.6%      0.5%      4.1%    (6.2%)    6.1%     16.5%     19.7%    19.6%      21.5%       1.7%      15.3%     25.3%      13.3%         5.5%
      Diluted shares                     (3.2%)     (4.3%)   (4.1%)    (3.4%)   (2.4%)    (1.4%)    (1.1%)   (1.6%)   (1.7%)    (1.7%)    (1.7%)   (1.7%)     (3.7%)     (1.8%)     (1.7%)    (2.2%)     (2.8%)       (1.5%)
    % Growth, sequential
      Revenue                              1.0%    23.2%     (17.7%)    5.7%      0.0%    20.8%    (15.3%)    5.3%     (1.4%)   26.9%    (16.0%)    9.6%
      Research and development            (6.6%)   (0.5%)      3.8%     5.5%     (2.7%)   (1.4%)     6.8%     6.8%     (1.7%)   (6.1%)     4.4%    12.5%
      Sales and marketing                (22.1%)   36.3%     (11.3%)   15.4%    (25.9%)   34.6%     (9.2%)   12.7%    (21.8%)   33.3%     (9.4%)   19.0%
      General and administrative          (5.0%)    0.7%      22.8%     1.6%     (1.4%)   (7.6%)    14.2%    (2.3%)    (0.0%)   (7.8%)    14.0%     6.3%
      Operating expenses                 (14.4%)   17.1%      (1.9%)    9.8%    (14.6%)   13.8%     (0.7%)    8.2%    (11.7%)   11.5%     (1.7%)   14.7%
      Operating income                    20.0%    14.7%     (30.1%)    8.1%     16.7%    11.7%    (25.9%)    9.6%     11.3%    26.1%    (23.9%)   10.2%
      Net income                          19.7%    22.6%     (21.1%)   12.3%     (2.3%)   14.6%    (25.3%)   10.3%     10.4%    25.8%    (23.2%)   10.3%
      Earnings per share                  21.5%    24.4%     (20.6%)   12.1%     (2.0%)   15.1%    (25.0%)   10.8%     10.9%    26.3%    (22.9%)   10.7%
      EPS - pro forma                     18.9%    24.4%     (27.6%)   23.0%     (2.0%)   15.1%    (25.0%)   10.8%     10.9%    26.3%    (22.9%)   10.7%
      Diluted shares                      (1.4%)   (1.4%)     (0.7%)    0.1%     (0.4%)   (0.4%)    (0.4%)   (0.4%)    (0.4%)   (0.4%)    (0.4%)   (0.4%)

Source: Company data, Nomura estimates




                                                                                                                                                                                                                               October 26, 2011
5
                                                                                                                                                                                                                                                       Nomura |
Fig. 5: Microsoft Segment Summary
$ in millions
                                                              FY 2011a                                    FY 2012e                                    FY 2013e                        Fiscal Year ending June               Calendar Year




                                                                                                                                                                                                                                                       Microsoft Corporation
    FY ending in June ($ millions)               sep        dec       mar         jun        sep       dec-e      mar-e      jun-e      sep-e      dec-e      mar-e      jun-e     FY 2011a   FY 2012e   FY 2013e   2010a      2011e        2012e
    Revenue
     Windows & Windows Live Division (WWLD)     $ 4,785    $ 5,053    $ 4,445    $ 4,740    $ 4,868    $ 5,064    $ 4,425    $ 4,740    $ 4,821    $ 5,776    $ 5,271    $ 5,573   $ 19,023   $ 19,098   $ 21,440   $ 19,269   $ 19,117     $ 19,762
     Server and Tools (S&T)                       3,864      4,295      4,006      4,535      4,250      4,743      4,405      4,985      4,668      5,225      4,816      5,447     16,700     18,382     20,157     16,014     17,534       19,283
     Online Services Division (OSD)                 527        693        647        662        625        813        759        777        724        946        883        903      2,529      2,975      3,455      2,354      2,747        3,206
     Microsoft Business Division (MBD)            5,221      6,126      5,351      5,884      5,622      6,218      5,649      6,209      5,885      6,496      5,924      7,451     22,582     23,698     25,757     21,063     23,075       24,240
     Entertainment and Devices (EDD)              1,795      3,698      1,935      1,485      1,963      4,150      2,535      2,005      2,356      4,980      2,788      2,205      8,913     10,653     12,329      7,847      9,533       11,875
     Unallocated and other                            3         88         44         61         44          0          0          0          0          0          0          0        196         44          0        143        149            0
    Revenue                                    $ 16,195   $ 19,953   $ 16,428   $ 17,367   $ 17,372   $ 20,988   $ 17,773   $ 18,716   $ 18,454   $ 23,423   $ 19,682   $ 21,579   $ 69,943   $ 74,850   $ 83,138   $ 66,690   $ 72,155     $ 78,366
    % Revenue
      Windows & Windows Live Division (WWLD)     29.5%      25.3%      27.1%      27.3%      28.0%      24.1%      24.9%      25.3%      26.1%      24.7%      26.8%      25.8%      27.2%      25.5%      25.8%      28.9%      26.5%        25.2%
      Server and Tools (S&T)                     23.9%      21.5%      24.4%      26.1%      24.5%      22.6%      24.8%      26.6%      25.3%      22.3%      24.5%      25.2%      23.9%      24.6%      24.2%      24.0%      24.3%        24.6%
      Online Services Division (OSD)              3.3%       3.5%       3.9%       3.8%       3.6%       3.9%       4.3%       4.2%       3.9%       4.0%       4.5%       4.2%       3.6%       4.0%       4.2%       3.5%       3.8%         4.1%
      Microsoft Business Division (MBD)          32.2%      30.7%      32.6%      33.9%      32.4%      29.6%      31.8%      33.2%      31.9%      27.7%      30.1%      34.5%      32.3%      31.7%      31.0%      31.6%      32.0%        30.9%
      Entertainment and Devices (EDD)            11.1%      18.5%      11.8%       8.6%      11.3%      19.8%      14.3%      10.7%      12.8%      21.3%      14.2%      10.2%      12.7%      14.2%      14.8%      11.8%      13.2%        15.2%
      Unallocated and other                       0.0%       0.4%       0.3%       0.4%       0.3%       0.0%       0.0%       0.0%       0.0%       0.0%       0.0%       0.0%       0.3%       0.1%       0.0%       0.2%       0.2%         0.0%
    % Growth, year-on-year
      Windows & Windows Live Division (WWLD)     66.1%     (29.7%)     (4.4%)     (0.9%)      1.7%       0.2%      (0.4%)      0.0%      (1.0%)     14.0%      19.1%      17.6%      (2.4%)      0.4%      12.3%      15.5%      (0.8%)        3.4%
      Server and Tools (S&T)                      9.0%       8.0%       8.1%       9.3%      10.0%      10.4%      10.0%       9.9%       9.8%      10.2%       9.3%       9.3%       8.6%      10.1%       9.7%      10.1%       9.5%        10.0%
      Online Services Division (OSD)              8.0%      19.7%      14.3%      16.5%      18.6%      17.4%      17.3%      17.4%      15.8%      16.3%      16.3%      16.2%      14.9%      17.6%      16.2%      13.4%      16.7%        16.7%
      Microsoft Business Division (MBD)          16.1%      25.9%      23.3%       9.5%       7.7%       1.5%       5.6%       5.5%       4.7%       4.5%       4.9%      20.0%      18.4%       4.9%       8.7%      14.3%       9.6%         5.0%
      Entertainment and Devices (EDD)            26.1%      54.7%      59.9%      29.8%       9.4%      12.2%      31.0%      35.0%      20.0%      20.0%      10.0%      10.0%      44.5%      19.5%      15.7%      17.1%      21.5%        24.6%
      Revenue                                    25.3%       4.9%      13.3%       8.3%       7.3%       5.2%       8.2%       7.8%       6.2%      11.6%      10.7%      15.3%      11.9%       7.0%      11.1%      13.6%       8.2%         8.6%
    % Growth, sequential
      Windows & Windows Live Division (WWLD)      0.1%       5.6%     (12.0%)      6.6%       2.7%       4.0%     (12.6%)      7.1%       1.7%      19.8%      (8.7%)      5.7%
      Server and Tools (S&T)                     (6.9%)     11.2%      (6.7%)     13.2%      (6.3%)     11.6%      (7.1%)     13.2%      (6.3%)     11.9%      (7.8%)     13.1%
      Online Services Division (OSD)             (7.2%)     31.5%      (6.6%)      2.3%      (5.6%)     30.1%      (6.6%)      2.3%      (6.9%)     30.7%      (6.7%)      2.3%
      Microsoft Business Division (MBD)          (2.9%)     17.3%     (12.7%)     10.0%      (4.5%)     10.6%      (9.1%)      9.9%      (5.2%)     10.4%      (8.8%)     25.8%
      Entertainment and Devices (EDD)            56.9%     106.0%     (47.7%)    (23.3%)     32.2%     111.4%     (38.9%)    (20.9%)     17.5%     111.4%     (44.0%)    (20.9%)
      Revenue                                     1.0%      23.2%     (17.7%)      5.7%       0.0%      20.8%     (15.3%)      5.3%      (1.4%)     26.9%     (16.0%)      9.6%

Source: Company data, Nomura estimates




                                                                                                                                                                                                                                                       October 26, 2011
6
                                                                                                                                                                                                                                                      Nomura |
Fig. 6: Microsoft Segment Summary (continued)
$ in millions
                                                             FY 2011a                                     FY 2012e                                    FY 2013e                        Fiscal Year ending June               Calendar Year




                                                                                                                                                                                                                                                      Microsoft Corporation
    FY ending in June ($ millions)              sep        dec        mar        jun        sep       dec-e      mar-e      jun-e      sep-e      dec-e      mar-e      jun-e      FY 2011a   FY 2012e   FY 2013e   2010a      2011e        2012e
    Operating income
     Windows & Windows Live Division (WWLD)    $ 3,286    $ 3,213    $ 2,786    $ 2,901    $ 3,251    $ 3,182    $ 2,678    $ 2,876    $ 3,163    $ 3,801    $ 3,269    $ 3,451    $ 12,186 $ 11,987 $ 13,684       $ 12,638 $ 12,120 $ 12,519
     Server and Tools (S&T)                      1,540      1,722      1,351      1,696      1,597      1,835      1,410      1,759      1,706      2,001      1,523      1,791       6,309    6,600    7,021          6,092    6,479    6,876
     Online Services Division (OSD)               (558)      (540)      (726)      (725)      (494)      (527)      (674)      (594)      (523)      (447)      (522)      (595)     (2,549)  (2,289)  (2,086)        (2,495)  (2,472)  (2,238)
     Microsoft Business Division (MBD)           3,465      4,057      3,260      3,727      3,661      4,051      3,557      3,921      3,823      4,200      3,731      4,611      14,509   15,190   16,365         13,283   14,699   15,501
     Entertainment and Devices (EDD)               386        668        219         20        352        657        265         50        329        781        267         37       1,293    1,324    1,415          1,032    1,248    1,426
     Corporate level activity                   (1,003)      (955)    (1,181)    (1,448)    (1,164)    (1,149)    (1,268)    (1,471)    (1,220)    (1,160)    (1,281)    (1,595)     (4,587)  (5,052)  (5,256)        (4,166)  (4,942)  (5,120)
    Operating income                           $ 7,116    $ 8,165    $ 5,709    $ 6,171    $ 7,203    $ 8,049    $ 5,967    $ 6,542    $ 7,278    $ 9,176    $ 6,986    $ 7,702    $ 27,161 $ 27,761 $ 31,143       $ 26,384 $ 27,132 $ 28,963
    % Operating margin
      Windows & Windows Live Division (WWLD)     68.7%     63.6%       62.7%      61.2%     66.8%      62.8%      60.5%      60.7%      65.6%      65.8%      62.0%      61.9%       64.1%      62.8%      63.8%      65.6%      63.4%       63.3%
      Server and Tools (S&T)                     39.9%     40.1%       33.7%      37.4%     37.6%      38.7%      32.0%      35.3%      36.5%      38.3%      31.6%      32.9%       37.8%      35.9%      34.8%      38.0%      36.9%       35.7%
      Online Services Division (OSD)           (105.9%)   (77.9%)    (112.2%)   (109.5%)   (79.0%)    (64.8%)    (88.8%)    (76.4%)    (72.3%)    (47.2%)    (59.2%)    (65.8%)    (100.8%)    (76.9%)    (60.4%)   (106.0%)    (90.0%)     (69.8%)
      Microsoft Business Division (MBD)          66.4%     66.2%       60.9%      63.3%     65.1%      65.2%      63.0%      63.1%      65.0%      64.7%      63.0%      61.9%       64.3%      64.1%      63.5%      63.1%      63.7%       63.9%
      Entertainment and Devices (EDD)            21.5%     18.1%       11.3%       1.3%     17.9%      15.8%      10.4%       2.5%      14.0%      15.7%       9.6%       1.7%       14.5%      12.4%      11.5%      13.2%      13.1%       12.0%
      % Operating margin                         43.9%     40.9%       34.8%      35.5%     41.5%      38.4%      33.6%      35.0%      39.4%      39.2%      35.5%      35.7%       38.8%      37.1%      37.5%      39.6%      37.6%       37.0%
    % Growth, year-on-year
      Windows & Windows Live Division (WWLD)   121.0%     (40.6%)     (9.3%)     (5.4%)     (1.1%)     (1.0%)     (3.9%)     (0.8%)     (2.7%)     19.5%      22.1%      20.0%       (6.5%)     (1.6%)     14.2%      13.9%     (4.1%)        3.3%
      Server and Tools (S&T)                    23.7%      17.6%       6.4%       8.7%       3.7%       6.5%       4.3%       3.7%       6.8%       9.1%       8.0%       1.8%       13.9%       4.6%       6.4%      18.5%      6.3%         6.1%
      Online Services Division (OSD)            17.0%      16.6%       2.4%       5.4%     (11.5%)     (2.5%)     (7.1%)    (18.1%)      5.9%     (15.2%)    (22.6%)      0.1%        9.1%     (10.2%)     (8.8%)     28.9%     (0.9%)       (9.5%)
      Microsoft Business Division (MBD)         23.8%      37.8%      28.2%      15.8%       5.7%      (0.1%)      9.1%       5.2%       4.4%       3.7%       4.9%      17.6%       26.1%       4.7%       7.7%      18.5%     10.7%         5.5%
      Entertainment and Devices (EDD)           46.2%      77.7%      46.0%        NM       (8.8%)     (1.6%)     20.9%        NM       (6.5%)     18.9%       1.0%     (25.9%)     109.2%       2.4%       6.9%     125.3%     20.9%        14.2%
      Operating income                          58.8%      (4.1%)     10.4%       4.1%       1.2%      (1.4%)      4.5%       6.0%       1.0%      14.0%      17.1%      17.7%       12.7%       2.2%      12.2%      23.2%      2.8%         6.7%
    % Growth, sequential
      Windows & Windows Live Division (WWLD)      7.2%     (2.2%)     (13.3%)      4.1%     12.1%      (2.1%)    (15.8%)      7.4%      10.0%      20.2%     (14.0%)      5.6%
      Server and Tools (S&T)                     (1.3%)    11.8%      (21.5%)     25.5%     (5.8%)     14.9%     (23.2%)     24.8%      (3.0%)     17.3%     (23.9%)     17.7%
      Online Services Division (OSD)            (18.9%)    (3.2%)      34.4%      (0.1%)   (31.9%)      6.6%      28.0%     (11.9%)    (12.0%)    (14.6%)     16.9%      13.9%
      Microsoft Business Division (MBD)           7.6%     17.1%      (19.6%)     14.3%     (1.8%)     10.7%     (12.2%)     10.2%      (2.5%)      9.9%     (11.2%)     23.6%
      Entertainment and Devices (EDD)              NM      73.1%      (67.2%)    (90.9%)      NM       86.7%     (59.7%)    (81.0%)       NM         NM      (65.8%)    (86.1%)
      Operating income                           20.0%     14.7%      (30.1%)      8.1%     16.7%      11.7%     (25.9%)      9.6%      11.3%      26.1%     (23.9%)     10.2%

Source: Company data, Nomura estimates




                                                                                                                                                                                                                                                      October 26, 2011
7
                                                                                                                                                                                                                                                                                    Nomura |
Fig. 7: Microsoft Statement of Cash Flows
$ in millions
                                                                           FY 2011a                                       FY 2012e                                         FY 2013e                           Fiscal Year ending June                   Calendar Year




                                                                                                                                                                                                                                                                                    Microsoft Corporation
    FY ending in June ($ millions)                         sep          dec        mar          jun         sep        dec-e       mar-e       jun-e        sep        dec-e       mar-e        jun-e      FY 2011a    FY 2012e    FY 2013e     2010a      2011e        2012e
    Statement of Cash Flows
    Cash flow from operations:
      GAAP Net income                                     $ 5,410      $ 6,634     $ 5,232     $ 5,874     $ 5,738     $ 6,577     $ 4,914     $ 5,422     $ 5,987     $ 7,530     $ 5,780      $ 6,372    $ 23,150    $ 22,651    $ 25,669    $ 20,568    $ 23,421     $ 23,853

      Depreciation, amortization, and non-cash items         $ 694       $ 663       $ 720      $ 689        $ 726       $ 409       $ 512      $ 615        $ 711       $ 807        $ 824      $ 842      $ 2,766     $ 2,262     $ 3,183     $ 2,769     $ 2,544      $ 2,644
      Stock-based compensation                                 528         553         541        544          558         525         525        525          525         525          525        525        2,166       2,133       2,100       2,044       2,168        2,100
      Net recognized losses (gains) on investments             (29)       (226)       (122)        15          (30)          0           0          0            0           0            0          0         (362)        (30)          0        (209)       (137)           0
      Stock option income tax benefits                           0           0           0          0            0           0           0          0            0           0            0          0            0           0           0           0           0            0
      Excess tax benefits from stock-based payments             (5)         (4)         (5)        (3)         (70)         (9)         (9)        (9)          (9)         (9)          (9)        (9)         (17)        (97)        (36)        (30)        (87)         (36)
      Deferred income taxes                                   (148)       (117)        (59)       326          402           0           0          0            0           0            0          0            2         402           0        (989)        669            0
      Deferral of unearned revenue                           5,881       6,834       6,616     11,896        6,139      (1,484)       (188)     4,369       (1,662)     (1,316)        (151)     5,948       31,227       8,835       2,818      28,484      23,167        1,202
      Recognition of unearned revenue                       (6,862)     (7,301)     (7,026)    (7,746)      (7,653)          0           0          0            0           0            0          0      (28,935)     (7,653)          0     (27,613)    (22,425)           0
      Other                                                      0           0           0          0            0           0           0          0            0           0            0          0            0           0           0           0           0            0

      Accounts receivable                                 $ 3,674      $(3,270)    $ 3,031     $(4,886)    $ 4,733     $(2,807)    $ 1,813     $(4,983) $ 5,473        $(4,004)    $ 2,358      $(6,923)    $(1,451) $(1,244) $(3,095)          $(1,793)    $ 71  $(1,700)
      Inventories and other current assets                   (260)         303        (788)     (1,075)       (660)          0           0           0        0              0           0            0      (1,820)    (660)       0              (127)  (2,523)       0
      Other long-term assets                                   62          118          (8)       (110)        (75)          0           0           0        0              0           0            0          62      (75)       0                19     (193)       0
      A/P and other current liabilities                    (1,311)        (284)        186         321      (1,435)      1,019         236         258     (639)           767         (52)         755      (1,088)      78      830               654       91      621
      Other long-term liabilities                             560          283         354          97         120           0           0           0        0              0           0            0       1,294      120        0             1,600      571        0
        Cash flow from operations                         $ 8,194      $ 4,186     $ 8,672     $ 5,942     $ 8,493     $ 4,229     $ 7,803     $ 6,197 $ 10,385        $ 4,298     $ 9,275      $ 7,509    $ 26,994 $ 26,723 $ 31,468          $ 25,377 $ 27,336 $ 28,684
    Cash flow from financing:
      Common stock issued                                    $ 177       $ 660     $ 1,405       $ 180       $ 336       $ 300       $ 300       $ 300       $ 300       $ 300       $ 300        $ 300     $ 2,422   $ 1,236   $ 1,200         $ 2,171     $ 2,221   $ 1,200
      Common stock repurchased                              (4,399)     (5,052)       (848)     (1,256)     (1,934)     (1,500)     (1,500)     (1,500)     (1,500)     (1,500)     (1,500)      (1,500)    (11,555)   (6,434)   (6,000)        (15,313)     (5,538)   (6,000)
      Issuance (repayment) of debt                           4,721      (1,000)      2,239           0           0           0           0           0           0           0           0            0       5,960         0         0           3,663       2,239         0
      Common+preferred dividend                             (1,118)     (1,363)     (1,349)     (1,350)     (1,341)     (1,691)     (1,684)     (1,676)     (2,003)     (1,994)     (1,986)      (1,977)     (5,180)   (6,392)   (7,960)         (4,750)     (5,731)   (7,357)
      Excess tax benefits from stock-based payments              5           4           5           3          70           9           9           9           9           9           9            9          17        97        36              30          87        36
      Other                                                    (25)          0         (15)          0           0           0           0           0           0           0           0            0         (40)        0         0             (15)        (15)        0
        Cash flow from financing                             $(639)    $(6,751)    $ 1,437     $(2,423)    $(2,869)    $(2,882)    $(2,875)    $(2,867)    $(3,194)    $(3,185)    $(3,177)     $(3,168)    $(8,376) $(11,493) $(12,724)       $(14,214)    $(6,737) $(12,121)
    Cash flow from investing:
      Less additions to property and equipment              $(564)       $(491)      $(658)      $(642)      $(436)     $(688)       $(688)     $(688)      $(571)      $(571)        $(571)     $(571)     $(2,355)    $(2,500)    $(2,285)    $(2,221)  $(2,424)       $(2,519)
      Acquisitions of companies, net of cash acquired           0          (69)          0          (2)       (875)         0            0          0           0           0             0          0          (71)       (875)          0        (212)     (877)             0
      Purchases of investments                             (7,417)      (5,896)    (14,394)     (8,286)    (11,299)         0            0          0           0           0             0          0      (35,993)    (11,299)          0     (28,704)  (33,979)             0
      Maturities of investments                               870        1,836       2,286       1,905       2,825          0            0          0           0           0             0          0        6,897       2,825           0       4,765     7,016              0
      Sales of investments                                  2,154        3,050       5,627       6,075       7,470          0            0          0           0           0             0          0       16,906       7,470           0       9,822    19,172              0
        Cash flow from investing                          $(4,957)     $(1,570)    $(7,139)      $(950)    $(2,315)     $(688)       $(688)     $(688)      $(571)      $(571)        $(571)     $(571)    $(14,616)    $(4,379)    $(2,285)   $(16,550) $(11,092)       $(2,519)
    Cash and equivalents, end of period:
      Net change in cash and equivalents                  $ 2,598      $(4,135)    $ 2,970     $ 2,569     $ 3,271       $ 659     $ 4,241     $ 2,642     $ 6,620       $ 542     $ 5,528      $ 3,770     $ 4,002    $ 10,851    $ 16,459     $(5,387) $ 9,507        $ 14,044
      Effect of exchange rates on cash and equivalents         58           (3)         28          20           0           0           0           0           0           0           0            0         103           0           0         (12)      48               0
      Cash and equivalents, beginning of period             5,505        8,161       4,023       7,021       9,610      12,881      13,540      17,781      20,423      27,043      27,585       33,112       5,505       9,610      20,423       9,422    4,023          13,540
      Cash and equivalents, end of period                 $ 8,161      $ 4,023     $ 7,021     $ 9,610    $ 12,881    $ 13,540    $ 17,781    $ 20,423    $ 27,043    $ 27,585    $ 33,112     $ 36,882     $ 9,610    $ 20,461    $ 36,882     $ 4,023 $ 13,578        $ 27,585
    Short-term investments, end of period                 $ 36,012    $ 37,229    $ 43,129    $ 43,162    $ 44,522    $ 44,522    $ 44,522    $ 44,522    $ 44,522    $ 44,522    $ 44,522     $ 44,522    $ 43,162    $ 44,522    $ 44,522    $ 37,229    $ 44,522     $ 44,522
      Cash, equivalents and ST investments, end of period $ 44,173    $ 41,252    $ 50,150    $ 52,772    $ 57,403    $ 58,062    $ 62,303    $ 64,945    $ 71,565    $ 72,107    $ 77,634     $ 81,404    $ 52,772    $ 64,983    $ 81,404    $ 41,252    $ 58,100     $ 72,107

Source: Company data, Nomura estimates




                                                                                                                                                                                                                                                                                    October 26, 2011
8
                                                                                                                                                                                                                                                                       Nomura |
Fig. 8: Microsoft Statement of Financial Position
$ in millions
                                                               FY 2011a                                       FY 2012e                                         FY 2013e                          Fiscal Year ending June                    Calendar Year




                                                                                                                                                                                                                                                                       Microsoft Corporation
    FY ending in June ($ millions)             sep         dec         mar          jun        sep         dec-e      mar-e        jun-e       sep-e       dec-e      mar-e        jun-e     FY 2011a    FY 2012e    FY 2013e    2010a         2011e        2012e
    Statement of Financial Position
    Assets:
      Cash and cash equivalents               $ 8,161     $ 4,023     $ 7,021     $ 9,610     $ 12,881    $ 13,540    $ 17,781    $ 20,423    $ 27,043    $ 27,585    $ 33,112    $ 36,882    $ 9,610     $ 20,423    $ 36,882   $ 4,023      $ 13,540      $ 27,585
      Short-term investments                   36,012      37,229      43,129      43,162       44,522      44,522      44,522      44,522      44,522      44,522      44,522      44,522     43,162       44,522      44,522    37,229        44,522        44,522
        Cash, equivalents, and ST investmen   $44,173     $41,252     $50,150     $52,772      $57,403     $58,062     $62,303     $64,945     $71,565     $72,107     $77,634     $81,404    $52,772      $64,945     $81,404   $41,252       $58,062       $72,107
      Accounts receivable, net                   9,646      12,874      10,033      14,987      10,153      12,960      11,147      16,130      10,656      14,661      12,302      19,225      14,987      16,130      19,225     12,874       12,960        14,661
      Inventories                                1,242         861       1,056       1,372       2,270       2,270       2,270       2,270       2,270       2,270       2,270       2,270       1,372       2,270       2,270        861        2,270         2,270
      Deferred income taxes                      2,344       2,548       2,586       2,467       2,190       2,190       2,190       2,190       2,190       2,190       2,190       2,190       2,467       2,190       2,190      2,548        2,190         2,190
      Other                                      2,176       2,149       2,438       3,320       3,255       3,255       3,255       3,255       3,255       3,255       3,255       3,255       3,320       3,255       3,255      2,149        3,255         3,255
      Total current assets                    $ 59,581    $ 59,684    $ 66,263    $ 74,918    $ 75,271    $ 78,738    $ 81,165    $ 88,790    $ 89,936    $ 94,482    $ 97,652   $ 108,344    $ 74,918    $ 88,790   $ 108,344   $ 59,684     $ 78,738      $ 94,482

      Property and equipment, net              $ 7,771     $ 7,799     $ 7,969     $ 8,162     $ 8,033     $ 8,402     $ 8,668     $ 8,831     $ 8,782     $ 8,637     $ 8,474     $ 8,294     $ 8,162     $ 8,831     $ 8,294    $ 7,799      $ 8,402     $ 8,637
      Equity and other investments               9,211      10,022      10,748      10,865       8,576       8,576       8,576       8,576       8,576       8,576       8,576       8,576      10,865       8,576       8,576     10,022        8,576       8,576
      Goodwill                                  12,471      12,502      12,554      12,581      12,537      12,537      12,537      12,537      12,537      12,537      12,537      12,537      12,581      12,537      12,537     12,502       12,537      12,537
      Intangible assets, net                     1,077         992         840         744       1,026         936         846         756         666         576         486         396         744         756         396        992          936         576
      Deferred income taxes                          0           0           0           0           0           0           0           0           0           0           0           0           0           0           0          0            0           0
      Other long-term assets                     1,429       1,307       1,353       1,434       1,972       1,972       1,972       1,972       1,972       1,972       1,972       1,972       1,434       1,972       1,972      1,307        1,972       1,972
    Total assets                              $ 91,540    $ 92,306    $ 99,727   $ 108,704   $ 107,415   $ 111,161   $ 113,764   $ 121,462   $ 122,469   $ 126,780   $ 129,697   $ 140,119   $ 108,704   $ 121,462   $ 140,119   $ 92,306    $ 111,161   $ 126,780

    Liabilities:
      Accounts payable                         $ 3,654     $ 3,863     $ 3,829     $ 4,197     $ 3,719     $ 4,738     $ 4,974     $ 5,232     $ 4,593     $ 5,359     $ 5,307     $ 6,062     $ 4,197     $ 5,232     $ 6,062    $ 3,863      $ 4,738       $ 5,359
      Short-term debt                            1,000           0           0           0           0           0           0           0           0           0           0           0           0           0           0          0            0             0
      Accrued compensation                       2,252       2,402       2,917       3,575       2,388       2,388       2,388       2,388       2,388       2,388       2,388       2,388       3,575       2,388       2,388      2,402        2,388         2,388
      Income taxes                               2,136       1,439         839         580         705         705         705         705         705         705         705         705         580         705         705      1,439          705           705
      Short-term unearned revenue               12,767      12,063      11,887      15,722      14,345      12,985      12,813      16,815      15,292      14,086      13,948      19,397      15,722      16,815      19,397     12,063       12,985        14,086
      Other                                      4,048       4,545       4,570       4,700       4,386       4,386       4,386       4,386       4,386       4,386       4,386       4,386       4,700       4,386       4,386      4,545        4,386         4,386
      Total current liabilities               $ 25,857    $ 24,312    $ 24,042    $ 28,774    $ 25,543    $ 25,202    $ 25,266    $ 29,526    $ 27,364    $ 26,925    $ 26,735    $ 32,938    $ 28,774    $ 29,526    $ 32,938   $ 24,312     $ 25,202      $ 26,925

      Long-term unearned revenue               $ 1,152     $ 1,354     $ 1,132     $ 1,398     $ 1,313     $ 1,189     $ 1,173     $ 1,539     $ 1,400     $ 1,289     $ 1,277     $ 1,775     $ 1,398     $ 1,539     $ 1,775    $ 1,354      $ 1,189       $ 1,289
      Long-term debt                             9,665       9,671      11,915      11,921      11,927      11,927      11,927      11,927      11,927      11,927      11,927      11,927      11,921      11,927      11,927      9,671       11,927        11,927
      Other long-term liabilities                7,924       8,488       9,186       9,528       9,241       9,241       9,241       9,241       9,241       9,241       9,241       9,241       9,528       9,241       9,241      8,488        9,241         9,241
      Total non-current liabilities           $ 18,741    $ 19,513    $ 22,233    $ 22,847    $ 22,481    $ 22,357    $ 22,341    $ 22,707    $ 22,568    $ 22,457    $ 22,445    $ 22,943    $ 22,847    $ 22,707    $ 22,943   $ 19,513     $ 22,357      $ 22,457

    Equity:
      Preferred stock                              $0          $0          $0        $0        $0        $0                $0          $0          $0          $0          $0          $0          $0        $0            $0         $0        $0             $0
      Common stock                              61,935      61,646      63,234    63,415    63,492    62,817            62,142      61,467      60,792      60,117      59,442      58,767      63,415    61,467        58,767     61,646    62,817         60,117
      Retained earnings                        (14,993)    (13,165)     (9,782)   (6,332)   (4,101)      785             4,016       7,761      11,745      17,281      21,075      25,471      (6,332)    7,761        25,471    (13,165)      785         17,281
      Stockholders' equity                    $ 46,942    $ 48,481    $ 53,452  $ 57,083  $ 59,391  $ 63,602          $ 66,158    $ 69,228    $ 72,537    $ 77,398    $ 80,517    $ 84,238    $ 57,083  $ 69,228      $ 84,238   $ 48,481  $ 63,602       $ 77,398
    Total liabilities and equity              $ 91,540    $ 92,306    $ 99,727 $ 108,704 $ 107,415 $ 111,161         $ 113,764   $ 121,462   $ 122,469   $ 126,780   $ 129,697   $ 140,119   $ 108,704 $ 121,462     $ 140,119   $ 92,306 $ 111,161      $ 126,780

Source: Company data, Nomura estimates




                                                                                                                                                                                                                                                                       October 26, 2011
9
Nomura | Microsoft Corporation   October 26, 2011




                                                10
Nomura | Microsoft Corporation                                                                                                                   October 26, 2011




Appendix A-1
Analyst Certification
I, Rick Sherlund, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.


Issuer Specific Regulatory Disclosures
Mentioned companies

Issuer name                                   Ticker  Price                        Price date     Stock rating   Sector rating     Disclosures
Microsoft Corporation                         MSFT US USD 26.81                    25-Oct-2011    Buy            Neutral           123


Disclosures required in the U.S.
123 Market Maker - NSI
    Nomura Securities International Inc. makes a market in securities of the company.



Previous Rating

Issuer name                                                                                         Previous Rating                Date of change
Microsoft Corporation                                                                               Not Rated                      07-Sep-2011


Microsoft Corporation (MSFT US)                                                    USD 26.81 (25-Oct-2011) Buy (Sector rating: Neutral)
Rating and target price chart (three year history)
                                                                                                             Date          Rating Target price   Closing price
                                                                                                             07-Sep-2011              32.00           26.00
                                                                                                             07-Sep-2011   BUY                        26.00




For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our 12-month target price is based on a weighted average of our three valuation metrics: DCF, P/E
and EV/uFCF. For our P/E and EV/uFCF calculations, we project out one year and assume either a constant multiple or some
multiple expansion or contraction. Our DCF implies a share price of $31, which we roll forward at the weighted-average cost of
capital (8.5%) for a value 12 months out of $34. On a P/E basis, we assume the relative multiple can expand back to its 2-year
average of a 12% discount to the market. This implies a 10.4x P/E on CY2012. On EV/uFCF, we roll forward our EV/uFCF
valuation metric one year at a multiple of 8.7x. We derive a weighted-average price target of $32. The benchmark for this stock
is the S&P 500.
Risks that may impede the achievement of the target price include: the company and its products atrophy on the maturing
PC platform; the PC segments of Windows and Office are too big, so any serious problems here could overshadow good news
elsewhere; Windows can't move successfully to a tablet-like environment; the PC industry declines; and the center of gravity




                                                                                                                                                                 11
Nomura | Microsoft Corporation                                                                              October 26, 2011


shifts more quickly from PC-based computing to mobile-based communications as the platform for innovation; management
changes; and macroeconomic risks to global financial stability.




                                                                                                                           12
Nomura | Microsoft Corporation                                                                                                        October 26, 2011


Important Disclosures
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The distribution of all ratings published by Nomura US Equity Research is as follows:
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54% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with this
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7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this
rating are investment banking clients of the Nomura Group*.
As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this
rating are investment banking clients of the Nomura Group*.
41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies with
this rating are investment banking clients of the Nomura Group*.
10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 20% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for
ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances
including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.
Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global
Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging
Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from
30 October 2008 and in Japan from 6 January 2009
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than
15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended'
indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain
circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.




                                                                                                                                                      13
Nomura | Microsoft Corporation                                                                                                        October 26, 2011


Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity
identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or
companies.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in
Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS
A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over
the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark
by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the
Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to
underperform the Benchmark by 15% or more over the next six months.
Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional
research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other
information contained herein.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -
Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior
to 30 October 2008
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and
20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is
between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.




                                                                                                                                                        14
Nomura | Microsoft Corporation                                                                                                                          October 26, 2011


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