Microsoft Corporation- Financial and Strategic Analysis Review

Transcription

1 Microsoft Corporation - Financial and Strategic Analysis Review Publication Date: Nov-2015 Company Snapshot Key Information Microsoft Corporation, Key Information Web Address Financial year-end June Number of Employees 118,000 NASD MSFT Key Ratios Microsoft Corporation, Key Ratios P/E Company Overview Microsoft Corporation (Microsoft) is a technology-based company that develops, licenses, and supports software products, services, and devices. Its product offerings include Microsoft Office systems, server products and tools, Windows PC operating systems, Xbox devices and accessories, and smartphones and peripherals; and services such as consulting, product support, advertising, video games and others. SWOT Analysis Microsoft Corporation, SWOT Analysis Strengths Weaknesses EV/EBITDA Return on Equity (%) Debt/Equity 0.44 Operating profit margin (%) Dividend Yield 0.02 Note: Above ratios are based on share price as of 18-Nov-2015 Share Data Microsoft Corporation, Share Data Price (USD) as on 18-Nov EPS (USD) 1.48 Book value per share (USD) Shares Outstanding (in million) 8,254 Increasing Working Capital Focused Research and Development Activities Strong Intellectual Property Opportunities Growing Demand for Cloud Computing Strategic Partnerships Demand for Smartphones Rising Debt Burden Cost Efficiency Threats Intense competition Foreign Currency Exchange Rate Risk Rapid Technological Changes Performance Chart Microsoft Corporation, Performance Chart ( ) Financial Performance The company reported revenues of (US Dollars) US$93,580 million for the fiscal year ended June 2015 (FY2015), an increase of 7.8% over FY2014. In FY2015, the company s operating margin was 19.2%, compared to an operating margin of 31.8% in FY2014. In FY2015, the company recorded a net margin of 13%, compared to a net margin of 25.4% in FY2014. The company reported revenues of US$20,379 million for the first quarter ended September 2015, a decrease of 8.1% over the previous quarter. Page 1

2 Key Information Microsoft Corporation, Key Information Corporate Address 1 Microsoft Way, Redmond, WA, , United States Ticker Symbol, Stock Exchange MSFT [NASDAQ] Telephone No. of Employees 118,000 Fax Fiscal Year End June URL Revenue (in USD Million) 93,580.0 Industry Locations Clean Technology, Pharmaceuticals and Healthcare, Technology and Telecommunication, Wealth Argentina, Australia, Brazil, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, North America, Norway, Singapore, South Africa, Taiwan, United Arab Emirates, United Kingdom, United States Company Overview Microsoft Corporation (Microsoft) is a technology-based company that develops, licenses, and supports software products, services, and devices. Its product offerings include Microsoft Office systems, server products and tools, Windows PC operating systems, Xbox devices and accessories, and smartphones and peripherals; and services such as consulting, product support, advertising, video games and others. The company manufactures phones through its production facilities and other products through third-party contract manufacturers; markets, distributes and sells its offerings through original equipment manufacturers (OEMs), distributors, and resellers, online media, and Microsoft retail stores and other partner channels. The company operates through offices in the Americas, Europe, Asia-Pacific, the Middle East and Africa. It has manufacturing facilities in Vietnam; operations centers in Ireland, Singapore, and the Americas. Microsoft is headquartered in Redmond, Washington, the US. Page 2

3 Microsoft Corporation - SWOT Analysis SWOT Analysis - Overview Microsoft Corporation (Microsoft) is one of the leading providers of software and hardware products. Strong R&D activities, intellectual property and increasing working capital are the major strengths of the company, even as increasing debt and cost efficiency are the major causes for concern. However, strategic partnerships and positive outlook for cloud computing are likely to offer new growth opportunities to the company. In the future, intense competition, foreign exchange risks, piracy and changing technology may affect its business operations. Microsoft Corporation - Strengths Strength - Increasing Working Capital The company reported increase in its working capital in FY2015. Improved working capital coupled with adequate cash reserves could help the company s short term business operations, enabling it to meet capital expenditures. In FY2015, the company reported working capital of US$74,854 million, as compared to working capital of US$68,621 million in FY2014. The increase in net working capital was due to increase in current assets. In FY2015, the company's total current assets increased 7% to US$10,939 million, as compared to US$10,226 million in FY2014. The company s cash and short term investments increased to US$96,282 million in FY2015 from US$85,465 million in FY2014, reflecting an increase of 12.7%. Strength - Focused Research and Development Activities Prioritizing innovation and optimization through strong research and development activity, the company develops a strong competitive advantage and builds brand equity. The major research areas of the company include algorithms and theory, hardware development, human-computer interaction, machine learning, adaptation, and intelligence, multimedia and graphics, systems, architecture, mobility, networking, security, cryptography, smart connected devices and cloud computing, among others. The company invests in the emerging technologies and breakthroughs in a wide spectrum of technologies, tools, and platforms spanning communication and collaboration; information access and organization; entertainment; business and e-commerce; advertising; and devices. The company explores the possibilities of developing new technologies through Microsoft Research Group. The company s major R&D facility is in Redmond, the US. It also operates R&D facilities in countries such as Canada, China, Denmark, Estonia, Finland, Norway, Sweden, Taiwan, Germany, India, Ireland, Israel, and the UK employing over 44,000 people. The company operates Microsoft Research, one of the world s largest computer science research organizations, and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science sector. In FY2015, Microsoft spent US$12 billon on its research and development activities as against US$11.4 billion in FY2014. Strength - Strong Intellectual Property Securing patent rights is important for the development of the company s product portfolio. A strong patent portfolio creates market exclusivity for the proprietary technology, giving the company an edge over its competitors. The company's success depends on its ability to maintain and establish the proprietary nature of its technology through the patent process. The company protects intellectual property investments in a variety of ways. It actively works in the U.S. and other countries to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to its software and hardware products, services, business plans, and branding. Microsoft maintains a comprehensive U.S. and international portfolio of intellectual property, which helps it in protecting its technologies. Microsoft is one of the leading technology companies with a portfolio of over 57,000 U.S. and international patents issued and over 35,000 pending. Microsoft is also involved in outbound and inbound licensing of related patented technologies that are incorporated into licensees or Microsoft s products. The company also purchases or licenses technology that it incorporates into products or services. A strong patent portfolio would help the company protect its products from infringement, strengthen its market presence and generate revenue through milestone licensing fees. Strength - Robust Distribution, Sales and Marketing Network The company has a strong distribution and marketing network. Microsoft markets and distributes its products through three major channels, namely, OEMs (original equipment manufacturers); distributors and resellers; and online. The company distributes its wide range of software products through OEMs. The OEMs integrate its software into PCs, tablets, servers, smartphones, and other intelligent devices and sell it directly to end consumers. The Windows operating system, pre-installed in several computing devices, is the largest component of the OEM business. The OEMs also sell hardware installed with Microsoft products such as server and embedded operating systems and applications. It also markets its Windows SkyDrive services through OEMs. A few reputed OEMs, which integrate the company s products in their offerings include Dell, Fujitsu, Acer, ASUS, LG, Lenovo, HTC, Hewlett-Packard, Sony, Toshiba, Nokia, and Samsung among others. The company licenses its products and services through large account resellers (LARs), distributors, value-added resellers (VARs), system builder channels, and retailers. LARs sell the company s products and services to large organizations; distributors resell to VARs; and VARs cater to small-sized and medium-sized organizations. The major distributors of the company s products and services are Ingram Micro and Tech Data. Its largest resellers are CDW, Dell, Insight Enterprises, Page 3

4 and Software House International, among others. It distributes retail packaged products to independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Its packaged products are also available at retail outlets, such as Wal-Mart, Dixons, and Microsoft Stores for individual consumers. Microsoft distributes hardware products through third-party retailers and Microsoft Stores. The company offers online content and services and commercial cloud-based services through Bing, Xbox LIVE, Outlook.com, MSN portals, Microsoft Office Web Applications, Office 365, Windows Phone Marketplace, Windows Stores, and Skype. The company also sells its products through its online store, microsoftstore.com. Several leading organizations license the company s products and services directly through enterprise agreements. Such a broad network of distribution, sales and marketing enhances the company s operational and financial performance. Microsoft Corporation - Weaknesses Weakness - Rising Debt Burden Increasing debt could have a major impact on the operational performance of the company, as a major portion of its earnings would be diverted to servicing its debt obligations. This could be of concern to investors as the company could find difficulty in raising funds on favorable terms from the market. Microsoft s total debt as of FY2015 was US$35,292 million, which increased 58.7% over that in the previous year. The company s debt to equity ratio increased to 0.4% in FY2014 from 0.2% in FY2014. If it fails to comply with any of the debt service requirements, the debt could become due and payable prior to its scheduled maturity. Such huge debt increases the debt servicing obligations of the company and impacts its cash flow adversely. It could limit Microsoft s ability to raise debt in future and pursue other strategic opportunities. It would also increase the company s vulnerability to adverse economic and industry conditions. Weakness - Cost Efficiency The company reported a decline in its cost efficiency in FY2015, which could affect its operational efficiency. In the FY2015, Microsoft reported an increase in its operating costs as a percentage of sales, which stood at 80.7% compared to 68.1% in FY2014. As a result, the operating margin decreased to 19.2% in FY2015 from 31.8% in FY2014. The decrease in operating margins was due to the increase in operating costs. The operating costs of the company increased to US$75,602 million in FY2015 from US$59,180 million in FY2014. This increase could be the result of increase in unusual expenses, which amounted to US$10,194 million in FY2015 from US$233 million in FY2014. Microsoft Corporation - Opportunities Opportunity - Growing Demand for Cloud Computing The company stands to benefit from the growing demand for cloud computing. According to Infocomm Development Authority of Singapore (IDA), the global market for cloud computing is expected to reach US$241 billion by Dependence on hard-to-deploy physical servers results in slow response to variable organizational needs, which drives organizations and government agencies worldwide to use cloud computing. Cloud computing provides easy and cost effective solutions to organizations, enabling them to address the need for data storage. It also offers reliable and easy storage to the telecom and related companies for developing mobile apps. At the same time, it is expected to reduce the IT companies spending on data analytics. Such positive outlook for cloud computing may increase the demand for the company s offerings, resulting in improved financial performance. Opportunity - Strategic Partnerships The company focuses on entering into new partnerships for the development of innovative and technologically advanced products. Such partnerships provide Microsoft a competitive edge and allow it to garner a higher market share. In November 2015, the company and PGA TOUR entered into a three-year relationship that focuses on technology and media integration. In October 2015, the company and TASER International entered into a partnership to bring together the global scale, and security commitment of both companies through the combined capabilities of the Microsoft Azure cloud platform and Windows 10 devices with TASER s Axon Platform and Evidence.com solution. In the same month, the company and ABB entered into a partnership to launch next-generation electric vehicle charging services platform. The company and ASUSTeK Computer Inc. extended their earlier patent licensing agreement. In September 2015, then company and China Electronics Technology Group entered into a partnership agreement. Under the terms of agreement, the company provides world-class operating system technology and services for Chinese users in specialized fields in government institutions and critical infrastructure state-owned enterprises. In the same month, the company and Salesforce entered into a strategic partnership to connect the Salesforce Customer Success Platform to Microsoft Office productivity apps and services. The company and Dell entered into an expanded partnership to deliver premium Windows 10 devices and world-class services and support to enterprise customers. In July 2015, the company and Kyocera Corporation signed an agreement expanding on a prior patent licensing arrangement. The new agreement enables the companies to use a broader range of each other s technologies in their respective products through a patent cross license. In April 2015, the company and Adobe entered into a strategic partnership that will redefine how enterprises manage their marketing, sales and service to engage with customers across touch points. In the same month, the company and Miele & Cie. KG entered into a collaboration Page 4

5 agreement to create smarter home appliances. Microsoft and Fujitsu Limited entered into collaboration to bring innovative operational excellence to manufacturing with the help of Fujitsu devices powered by Windows 8.1 Pro, the Internet of Things services of FUJITSU Cloud A5 for Microsoft Azure, and the Fujitsu IoT/M2M platform. Opportunity - Demand for Smartphones The company could capitalize on the growing demand for smartphones, which is emerging as a major growth opportunity for providers of wireless Internet access. According to in-house research, the global smartphones sales are expected to reach 1.9 billion by Moreover, the global smartphone market is expected to reach US$ billion by The growth would result from factors including lower product costs, improved handset design and functionalities, expansion of global mobile and browsing services, the emergence of 3G and 4G network technologies, and the standardization and upgrades of operating systems. Considerable demand is expected from developing countries, particularly in Asia-Pacific region, besides North America. Emerging economies including China, India and Brazil are expected to register considerable increase in the usage of smartphones, besides the US and the UK. Microsoft Corporation - Threats Threat - Intense competition The software market is highly competitive, which could affect the company s performance. The company faces stiff competition in all its segments. Its major competitors in Windows Live software and services include Apple, Google and Yahoo! Its Internet Explorer faces stiff competition from the browsers developed by Google (Chrome), Apple (Safari), Mozilla, and Opera Software Company. The company s server and tools compete against the related offerings of IBM and Oracle. Its embedded systems compete directly with the offerings of IBM and Intel. In the mobile software segment, the company faces stiff competition from the likes of Apple 's iphone and Google's Andriod. Some of its major competitors for its Microsoft Office products include Adobe, IBM, Google, Apple and Oracle. It competes with Nintendo and Sony in its entertainment devices business. Such intense competition across all its business segments may make the company susceptible to market pressures, which leads to a loss in the market share and decline in revenue. Threat - Foreign Currency Exchange Rate Risk Exchange rate volatility could have an adverse effect on the company's financial results. The company has operations in many parts of the world. It operates in over 100 countries and a significant part of its revenue comes from international sales. The asset values, earnings and cash flows are influenced by a range of currencies. A substantial portion of overseas sales could be affected by foreign currency exchange rate fluctuations. A significant portion of revenue from overseas business operations is denominated in currencies such as Chinese Renminbi, European Euro, U.K. Pound Sterling and Canadian Dollar. It is exposed to currency risks associated with the purchases, sales and borrowings from different markets. Changes in the exchange rates could affect the consolidated results of operations and impact its overall profitability. Threat - Rapid Technological Changes The technology market is subject to rapid changes, and to compete effectively, the company must continually introduce new products that achieve market acceptance. The IT enabled communication equipment industry is characterized by fast technological changes, evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make the existing products or products under development obsolete or unmarketable. In order to remain competitive and increase its sales, the company needs to adapt to the rapidly changing business environment. Threat - Availability of Pirated Versions of its Products The technology market is subject to rapid changes, and to compete effectively, the company must continually introduce new products that achieve market acceptance. The IT enabled communication equipment industry is characterized by fast technological changes, evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make the existing products or products under development obsolete or unmarketable. In order to remain competitive and increase its sales, the company needs to adapt to the rapidly changing business environment. NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only Page 5