Financial Research Report Fin 534

1Financial Research Report

Financial Research Report

Angelo Logan

Strayer University

Professor Jeffery Woo

FIN 534

September 3, 2011


Abstract

This paper will provide a complete financial report on Microsoft, a US publicly-traded company

headquartered in the United States. A company overview will be conducted to describe the

company’s operations, locations, markets, and lines of business. Financial statements for the past

three years will be discussed along with ratio analysis. The company’s common stock price will

also be analyzed for the past five years and compared to the Standard & Poor’s Stock Market

Index. This research considers the company's culture, a critical factor in the corporation's

success.


Company Overview

Today, Microsoft's operating system controls the largest share of personal computers in

the world, and one of its founders, Bill Gates, is recognized as being either the wealthiest, or

among the wealthiest individuals on earth. From revolution to evolution, Microsoft continues a

tradition of innovation. In 1975, you couldn't buy a personal computer-unless you wanted to

build it yourself. Collaborating with coworkers meant poring over photo or carbon copies of

documents. And keeping in touch? Most of us still turned to Uncle Sam or Ma Bell. Yet, in 1975,

Bill Gates and Microsoft cofounder Paul Allen saw the potential to turn a hobbyist's toy into

something more. They sold the first software language program, called BASIC, for the Micro

Instrumentation and Telemetry Systems (MITS) Altair 8800, the first "personal computer."

BASIC, and the many software programs that followed from Microsoft developers and partners,

helped spark a technology revolution that has transformed how we do business, how we live, and

how we learn (Willis, 2010). If it were not for Microsoft I probably would not be able to earn my

degree on-line with Strayer University.

Although Gates lacks a college degree he was able to build the Microsoft Empire using

strategic marketing techniques, careful product positioning, and by changing the way that people

do business. Microsoft defines its mission "To enable people and businesses throughout the

world to realize their full potential." Millions of people around the world use Microsoft’s

technology every day, from multinational corporations that do business in many currencies and

languages to small companies that count on just-in-time inventory systems to keep orders

flowing. Educators and students alike use their software for lesson plans, homework, and

collaborating on projects. In the home, families manage their personal finances, share

photographs, and communicate online (Batchelor, 2011).


Microsoft generates revenue by developing, manufacturing, licensing, and supporting a

wide range of software products for many computing devices. Their software products include

operating systems for servers, personal computers (PCs), and intelligent devices; server

applications for distributed computing environments; information worker productivity

applications; business solutions; and software development tools (Willis, 2010). They also

provide consulting and product support services, and train and certify system integrators and

developers. They sell the Xbox video game console and games, PC games, and peripherals.

Online communication services and information services are delivered through our MSN portals

and channels around the world (Batchelor, 2011).

Microsoft also research and develop advanced technologies for future software products.

Delivering breakthrough innovation and high-value solutions through integrated platform seems

to be their strategy to meeting customer needs and to their future growth (Willis, 2010). I believe

that over the past few years Microsoft has laid the foundation for long-term growth by making

global citizenship an integral part of their business, delivering innovative new products, creating

opportunity for partners, improving customer satisfaction, putting some of their most significant

legal challenges behind them, and improving their internal processes.

Although most of its researchers are based at Microsoft’s Redmond, Washington,

headquarters, Microsoft does business almost everywhere in the world. They have offices in

more than 90 countries, which are grouped into six corporate regions: North America (the United

States and Canada); Latin America (LATAM); Europe, the Middle East, and Africa (EMEA);

Japan; Asia Pacific (APAC); and Greater China. We also have operational centers in Dublin,

Ireland; Humacao, Puerto Rico; Reno, Nevada, USA; and Singapore. The operational centers are


responsible for licensing, manufacturing, and operations and logistics, although not every center

performs all of these functions (Willis, 2010).

Foreign operations affect Microsoft in a positive way. Microsoft, like many American

companies, competes on a global stage. They have subsidiaries, affiliates and business partners

throughout the world. Projects to develop new products and to improve existing products

frequently involve working in various foreign countries. Microsoft Windows is the company's

flagship product and accounts for most of its revenue. The Windows operating system is almost

ubiquitous with computers around the world (Batchelor, 2011).

Financial Overview

Balance Sheet

2010 2009 2008

Assets

Current Assets

Cash And Cash Equivalents 9,610,000 5,505,000 6,076,000

Short Term Investments 43,162,000 31,283,000 25,371,000

Net Receivables 17,454,000 15,198,000 13,405,000

Inventory 1,372,000 740,000 717,000

Other Current Assets 3,320,000 2,950,000 3,711,000

Total Current Assets 74,918,000 55,676,000 49,280,000

Long Term Investments 10,865,000 7,754,000 4,933,000

Property Plant and Equipment 8,162,000 7,630,000 7,535,000

Goodwill 12,581,000 12,394,000 12,503,000

Intangible Assets 744,000 1,158,000 1,759,000

Accumulated Amortization - - -

Other Assets 1,434,000 1,501,000 1,599,000

Deferred Long Term Asset Charges - - 279,000

Total Assets 108,704,000 86,113,000 77,888,000

Liabilities


Current Liabilities

Accounts Payable 9,560,000 8,564,000 8,889,000

Short/Current Long Term Debt - 1,000,000 2,000,000

Other Current Liabilities 19,214,000 16,583,000 16,145,000

Total Current Liabilities 28,774,000 26,147,000 27,034,000

Long Term Debt 11,921,000 4,939,000 3,746,000

Other Liabilities 8,072,000 7,445,000 6,269,000

Deferred Long Term Liability Charges 2,854,000 1,407,000 1,281,000

Minority Interest - - -

Negative Goodwill - - -

Total Liabilities 51,621,000 39,938,000 38,330,000

Stockholders' Equity

Misc Stocks Options Warrants - - -

Redeemable Preferred Stock - - -

Preferred Stock - - -

Common Stock 63,415,000 62,856,000 62,382,000

Retained Earnings (6,332,000) (16,681,000) (22,824,000)

Treasury Stock - - -

Capital Surplus - - -

Other Stockholder Equity - - -

Total Stockholder Equity 57,083,000 46,175,000 39,558,000

Net Tangible Assets 43,758,000 32,623,000 25,296,000 Currency in USD.

INCOME STATEMENTS(In millions, except per share amounts)

2010 2009 2008

Revenue $ 62,484 $ 58,437 $ 60,420

Operating expenses:

Cost of revenue 12,395 12,155 11,598

Research and development 8,714 9,010 8,164

Sales and marketing 13,214 12,879 13,260


General and administrative 4,004 3,700 5,127

Employee severance 59 330 0

Total operating expenses 38,386 38,074 38,149

Operating income 24,09820,363

22,271

Other income (expense) 915 (542) 1,543

Income before income taxes 25,01319,821

23,814

Provision for income taxes 6,253 5,252 6,133

Net income $18,760 $14,569

$17,681

Earnings per share:

Basic $2.13 $1.63 $1.90

Diluted $2.10 $1.62 $1.87

Weighted average shares outstanding:

Basic 8,813 8,945 9,328

Diluted 8,927 8,996 9,470

Cash dividends declared per common share

$0.52 $0.52 $0.44

CASH FLOWS STATEMENTS

(In millions)

2010 2009 2008

Operations

Net income $ 18,760 $ 14,569 $ 17,681

Adjustments:


Depreciation, amortization 2,673 2,562 2,056

Stock-based compensation 1,891 1,708 1,479

Net recognized losses (gains) on investments and derivatives (208) 683 (572)

Excess tax benefits from stock-based compensation (45) (52) (120)

Deferred income taxes (220) 762 935

Deferral of unearned revenue 29,374 24,409 24,532

Recognition of unearned revenue (28,813)(25,426)

(21,944)

Changes in operating assets and liabilities:

Accounts receivable (2,238) 2,215 (1,569)

Other current assets 420 (422) 153

Other long-term assets (223) (273) (98)

Other current liabilities 1,295 (3,371) (748)

Other long-term liabilities 1,407 1,673 (173)

Net cash from operations 24,073 19,037 21,612

Financing

Short-term borrowings (repayments), maturities of 90 days or less, net

(991) 1,178 0

Proceeds from issuance of debt, maturities longer than 90 days 4,167 4,796 0

Repayments of debt, maturities longer than 90 days (2,986) (228) 0

Common stock issued 2,311 579 3,494

Common stock repurchased (11,269) (9,353) (12,533)

Common stock cash dividends paid (4,578) (4,468) (4,015)


Excess tax benefits from stock-based compensation 45 52 120

Other 10 (19) 0

Net cash used in financing (13,291) (7,463) (12,934)

Investing

Additions to property and equipment (1,977) (3,119) (3,182)

Acquisition of companies, net of cash acquired (245) (868) (8,053)

Purchases of investments (30,168)(36,850)

(20,954)

Maturities of investments 7,453 6,191 2,597

Sales of investments 15,125 19,806 25,132

Securities lending payable (1,502) (930) (127)

Net cash used in investing (11,314)(15,770)

(4,587)

Effect of exchange rates on cash and cash equivalents (39) (67) 137

Net change in cash and cash equivalents (571) (4,263) 4,228

Cash and cash equivalents, beginning of period 6,076 10,339 6,111

Cash and cash equivalents, end of period $ 5,505 $ 6,076 $ 10,339

STOCKHOLDERS’ EQUITY STATEMENTS(In millions)

2010 2009 2008


Common stock and paid-in capital

Balance, beginning of period $62,382 $ 62,849 $ 60,557

Common stock issued 2,311 567 3,504


Stock-based compensation expense 1,891 1,708 1,479

Stock-based compensation income tax benefits (deficiencies) (647) (128) 253

Other, net 32 (3) 78

Balance, end of period 62,856 62,382 62,849

Retained deficit

Balance, beginning of period (22,824)(26,563)

(29,460)

Cumulative effect of a change in accounting principle relating to uncertain tax positions

0 0 (395)

Cumulative effect of a change in accounting principle relating to costs of certain compensated absences

0 0 (17)

Net income 18,760 14,569 17,681

Other comprehensive income:

Net unrealized gains on derivatives 27 302 18

Net unrealized gains (losses) on investments 265 (233) (653)

Translation adjustments and other (206) (240) 121

Comprehensive income 18,846 14,398 17,167

Common stock cash dividends (4,547) (4,620) (4,084)


Balance, end of period (16,681)(22,824)

(26,563)


Total stockholders’ equity $ 46,175 $ 39,558 $ 36,286

Ratio Analysis

Current Trend and ratio analysis (Using the average method)

2008 2009 2010 Current trend

Current Assets49,280,00

0 55,676,00074,918,00

0 increase 1.23 per yearFixed Assets 1,759,000 1,158,000 744,000 decrease 1.53 per year

Current Liabilities27,034,00

0 26,147,00028,774,00

0 increase 1.03 per year

Long-term liability38,330,00

0 39,938,00051,621,00


Owners Equity57,083,00

0 46,175,00039,558,00

0 decrease 1.20 per year

Sales Revenues13,260,00

0 12,879,00013,214,00

0 decrease 0.98 per year

EBIT23,814,00

0 19,821,00025,013,00


Net Income17,681,00

0 14,569,00018,760,00

0 increase 1.03 per yearEarnings Per Share 2 2 2 2

Future Trend and ratio analysis projected for three years (Using the average method)

2011 2012 2013

Future Assets92,149,14

0113,343,44

2139,412,43

3Fixed Assets 486,274 317,826 207,729

Current Liabilities29,637,22

0 30,526,336 31,442,126

Long-term liability59,880,36

0 69,461,217 80,575,012

Owners Equity32,965,00

0 27,470,833 22,892,361

Sales Revenue12,949,72

0 12,690,725 12,436,911

EBIT25,513,26

0 26,023,525 26,543,995

Net Income19,322,80

0 19,902,484 20,499,558Earnings Per Share 2 2 2


Stock Price Analysis

Microsoft common stock for the past 5 years

After reviewing Microsoft’s stock history for the past 5 year for an investor who is

looking for value, I feel Microsoft is a good choice. According to the text, the law of One Price

implies that to value any security, you must determine the expected cash flows an investor will

receive from owning it (Berk & DeMarzo, 2010 p.252). As you look at the graph you can clearly

see that Microsoft suffered a huge drop in 2009 just like most of the technology stocks did that

year. However, they quickly rebounded going into 2010. The company may not keep raising the

dividend annually, as it has done since first offering one in 2003, but it's not likely to cut it

either. Ultimately, the reason Microsoft is going to be a good investment for the future is because

it has a strong core business, good cash flow and tons of cash on the books, not to mention they

are always coming out with new ideas to generate even more revenue. The biggest plus that

Microsoft has is that PC sales to emerging markets continued to grow at a rapid pace as a record

number of people around the world are using Windows PCs.

The S&P Stock Market for the past five years.


After the Dow Jones Industrial Average, the S&P 500 is one of the most commonly

followed equity indices, is considered a bellwether for the American economy, and is included in

the Index of Leading Indicators. Many mutual funds, exchange-traded funds, and other funds

such as pension funds, are designed to track the performance of the S&P 500 index. Hundreds of

billions of US dollars have been invested in this fashion. S&P 500 refers not only to the index,

but also to the 500 companies that have their common stock included in the index. The ticker

symbol for the S&P 500 index varies. Some examples of the symbol are ^GSPC, .INX, and

$SPX (Money, Yahoo).

Microsoft stock against The S&P for the past 5 years


When it comes to bargain valuation, Microsoft trades for less than 8 times next year’s

earnings (when you back out cash). Compare that to the S&P 500 which trades for about 13

times next year’s earnings. That would be impressive enough, but the icing on the cake is that

MSFT earnings will grow twice as fast as the S&P earnings over the next five years. Much of

MSFT’s revenues have shifted to subscription revenues making their earnings very

predictable. The company is no longer as reliant on flashy software launches and one-shot sales

(Money, Yahoo). It is clear from the graph that Microsoft has out-performed The S&P 500 Index

for the past 5 years.

Conclusions

Microsoft is one of the leading Software agency and remains on top among other software

agencies, creating a new dimension for the next generations’ technology. From the above study I


conclude that Microsoft has relatively high earned revenue in an increasing order with an

average net growth rate of 9% to 18% and with a net income increases every year with every

new product and product update launch, since last decades. Microsoft always kept its policies of

product assurance and so as of its shareholders.

Reference

Batchelor, B. (2011). History of the Microsoft Corporation. eHow-Money


http://www.ehow.com/about_5089170_history-microsoft-corporation.html

Berk, J. & DeMarzo, P. (2011). Corporate Finance: The Core: Custom Edition. (2nd Ed.).

Boston: Pearson Education. Saddle River, NJ.

Willis, M. (2010). ehow Money. Microsoft organization & Structure. Retrieved from:

http://www.ehow.com/about_6711983_microsoft_s-organization-structure.html

http://finance.yahoo.com/q/cf?s=MSFT+Cash+Flow&annual

http://research.microsoft.com/en-us/labs/default.aspx

http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=msft

http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=msft

http://research.microsoft.com/en-us/labs/default.aspx

http://finance.yahoo.com/q/cf?s=MSFT+Cash+Flow&annual

http://www.ehow.com/about_6711983_microsoft_s-organization-structure.html

http://www.ehow.com/about_5089170_history-microsoft-corporation.html

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Financial Research Report Fin 534