FINANCIAL ANALYSIS:
NAME: Microsoft
EXECUTIVE SUMMARY:
Microsoft (NASDAQ "MSFT") is a global leader that develops, licenses,
markets, and supports software, services, and devices. They're most known
for Windows, Microsoft Office, Office 365, Lync, Azure, X-box gaming and
Lumina smartphones. On January 21, 2015 Microsoft debut Windows 10 and a
very innovative product called Halolens. The reason for this summary is the
financial analysis regarding the release and marketing problems associated
with this new product. Halolens needs to have effective publicity and
marketing to be successful and not end up being perceived as Microsoft's
version of Google Glass.
Halolens is a cutting edge holographic computing device. The device
produces objects made entirely of light and the hologram appears like real
physical objects. Hololens is an eyepiece similar to Google Glass except
it's linked to Windows 10 operating system that will be released during the
4th quarter of 2015. The Hololens creates a unique gaming experience much
more advanced than Microsoft's X-Box Kinect's gesture-control device, which
tracks people's movements through space and feeds the data into an
interface. Halolens can also operate tasks that Facebook's Oculus Rift was
made for.
Halolens isn't meant to be worn like Google Glass's eyewear. The Google
Glass eyewear had a limited release in 2014 and was discontinued on January
19, 2015 because it wasn't well received by the public or our government
due to privacy issues and price. Therefore it presents a unique marketing
opportunity for Halolens and Windows Halolens also has unique capabilities
such as creating 3-D images that can be used for 3-D printing and it
enables an augmented reality that one can incorporate and use in an
existing environment. Unlike Facebook's Oculus Rift that optically tricks
your brain into thinking you are really in an alternate space/reality.
Since Oculus Rift still hasn't been released for retail sales and Google is
working on the 2nd generation of Google Glass, Microsoft can use this as
another opportunity to jump ahead of the competition.
Microsoft operates in a highly competitive market and some of their base
operating systems are in a period of transition. Competitors are always
developing new devices for consumers and businesses. The devices a customer
prefers are always rapidly evolving. Microsoft's ecosystem must continue to
adapt and evolve to keep the pace of technology's ever changing
environment. Investments in new technology must have value to customers
and increase revenues, grow market share and continue to delight
shareholders. Microsoft typically spends about 17% of their revenue on R&D.
Their competition, Sony spends about 8%. Apple spends less than 4%.
(Gizmodo.com, 2015)
Below are the most recent financial statements per Yahoo, finance. This
information will be used to evaluate Microsoft's financial capacity to
launch and promote Halolens along with Windows 10.
"Income Statement "
" "
"Revenue (ttm): "
"93.46B "
" "
"Revenue Per Share (ttm): "
"11.33 "
" "
"Qtrly Revenue Growth (yoy): "
"8.00% "
" "
"Gross Profit (ttm): "
"59.90B "
" "
"EBITDA (ttm)6: "
"33.61B "
" "
"Net Income Avl to Common (ttm): "
"20.68B "
" "
"Diluted EPS (ttm): "
"2.48 "
" "
"Qtrly Earnings Growth (yoy): "
"-10.60% "
" "
"Balance Sheet "
" "
"Total Cash (mrq): "
"89.57B "
" "
"Total Cash Per Share (mrq): "
"10.92 "
" "
"Total Debt (mrq): "
"28.74B "
" "
"Total Debt/Equity (mrq): "
"31.28 "
" "
"Current Ratio (mrq): "
"2.45 "
" "
"Book Value Per Share (mrq): "
"11.18 "
" "
"Cash Flow Statement "
" "
"Operating Cash Flow (ttm): "
"32.31B "
" "
"Levered Free Cash Flow (ttm): "
"23.02B "
" "
http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics
Currently Microsoft is profitable with revenues close to 93.46B and Gross
Profit of 59.90B. Per the 2013 Annual Report, growth is estimated to be 5%
for 2015. With the release of Halolens and Windows 10, 4Q of 2015, revenues
are expected to increase in 2016.
SWOT ANALYSIS:
Below identifies strengths, weaknesses, opportunities and treats to the
release of Microsoft Halolens.
RECOMMENDATIONS AND JUSTIFICATIONS:
RECOMMENDATION #1: Microsoft should increase their capital expenditures
for products such as Windows 10 and Hololens.
JUSTIFICATION #1:
Capital expenditures should increase because it increases competitiveness
in growth markets, allows the creation of new growth categories and
positively impacts returns for investors. Examples would be the launch of
two new hardware with Windows 10, Microsoft Surface Hub and Hololens.
Microsoft Surface Hub will revolutionize meetings and group collaboration
and the Hololens will open up new markets and opportunities for Microsoft.
Microsoft announced last month that capital expenditures would increase in
coming years in support of cloud technology. I also foresee spending money
to build additional data centers to support cloud storage and for Microsoft
Azure, its rival to Amazon Web Services.
RECOMMENDATION #2: Microsoft should increase growth by acquiring corporate
licensing and by acquiring other companies for synergy and internal growth.
JUSTIFICATION #2:
Microsoft needs to continue the status quo of acquiring advanced analytics
and licensing that will enhance current hardware and future applications
such as:
Acompli, a provider of innovative e-mail applications for iOS and
Android.
Hockey App, a mobile app testing and development service that enhances
Azure Services for Mobile Developers.
Aorato, which accelerates Microsoft's ability to give customers unique
security capabilities by tapping into behavioral intelligence around
identity and access spanning on premise and the cloud.
Equivio, this involves machine learning that is applied to e-discovery
and compliance processes.
The common theme across all these acquisitions is advanced data analytics
and machine learning driven capabilities that improve with more customer
adoption and usage of the cloud.
RECOMMENDATION #3: Microsoft should increase leverage (debt) to avoid U.S.
Taxes.
JUSTIFICATION #3:
On February 9, 2015 Microsoft initiated a bond sale for general corporate
purposes that may include stock buybacks, capital expenditures and repaying
existing debt. This was the largest U.S. corporate-bond sale this year,
selling $10.75 billion in debt with maturities of 5 to 40 years. By
borrowing the money in the US, they can pay shareholders without having to
bring offshore profits into the US and pay 35% in corporate income tax.
Microsoft also announced their intention to complete their remaining $31
billion share repurchase authorization by December 31, 2016. This will
continue Microsoft's ongoing commitment to increase capital return for
shareholders, while investing in growth. (Forbes, 2015)
RECOMMENDATION #4: Microsoft should increase their marketing. This should
be done online, print and in trade shows/conventions. They should also
increase international marketing spending for annuity contracts.
JUSTIFICATION #4:
Since US and Europe met sales expectations and China and Japan were below
expectations, market spending should increase in China and Japan. China
currently has what Microsoft calls a set of "geopolitical issues" that need
worked through and China has a large potential growth market. Japan has the
largest, most dense population of baby boomers born between 1943 and 1949,
they make up nearly 21% of the population. This growth sector is important
to Microsoft because they have the highest per capita of disposable income
and market for annuity contracts for products such as Office 365. (Jetro,
2008)
Today, most organizations either pay full price or give Microsoft 29
percent of Office's full price over a 2 or 3 year contract. Customers pay
cost per license upfront plus an additional fee annually. About 60 percent
of Office revenue comes from annuity contracts, which is money in the bank
and commitment that discourages switching to other products. Therefore,
marketing annuities needs to increase and social media marketing needs to
be increased.
An example of a marketing success that can be used in other platforms is
this: "Microsoft wanted to increase its presence by reaching out to IT as
well as business decision makers in enterprise and mid-market companies
across India." (marketing.linkedin.com) Microsoft India, partnered with
LinkedIn using content marketing as a way to reach out to the IT
stakeholders. This was done when Microsoft leveraged LinkedIn and created
an exclusive, by-invite-only group called 'Be Future Ready', intended for
tech decision makers in India. The group was promoted across the platform
and today is over 7,000 members strong. In this group Microsoft shared its
message using organic updates as well as LinkedIn's "Sponsored Updates", to
extend their message and reach key decision makers.
RECOMMENDATION #5: Microsoft should maintain current R&D spending.
JUSTIFICATION #5:
One would think that R & D would have always been a priority to Microsoft
but in the past it isn't what Microsoft focused on. Instead Microsoft
focused on mergers, acquisitions and collaborations to grow their business.
It's more economical to outsource R & D and hire independent contractors
than to invest the time and manpower on projects that may just lead to dead
ends. An example is the introduction of Bluetooth. Back in 2008 a
collaborative project with Nokia showed Microsoft the importance of
Bluetooth. Microsoft didn't realize the importance and didn't have the
capabilities until it was brought to their attention. A Bluetooth file
sharing feature was popular in developing countries, but Microsoft wasn't
aware as US consumers didn't typically use it. Microsoft didn't even have
that feature, and didn't even understand or appreciate the degree to which
it was critical. I think that it would be a mistake to reduce R & D
spending, therefore spending on R& D should remain 17% of revenue as it has
been over the last few years. I also think it's beneficial to continue
collaborative projects.
RECOMMENDATION #6: Microsoft should continue to control costs including
labor, health care, and pension liabilities.
JUSTIFICATION #6:
Microsoft can control labor, health care and pension liabilities by
continuing to hire independent contractors. The reasons why are:
If a worker is an independent contractor, Microsoft isn't required to:
1) withhold federal, state or local income taxes for the worker,
2) make federal social security (FICA) or unemployment insurance tax
contributions on
behalf of the worker; or
3) make state workers' compensation or unemployment or disability
insurance contributions
on the worker's behalf.
4) pensions are not provided to independent contractors.
5) discrimination laws don't apply in the same way to contractors, so
this will reduce lawsuits.
Microsoft has to walk a tight line on this because they were sued and lost
in a case for treating independent contractors as employees by working side
by side and requiring same working hours, breaks etc…
(Vizcaino v. Microsoft, 120 F.2d 1006 (9th Cir. 1997) (en banc), cert.
den'd, 118 S. Ct. 899
(1998), this case brought the issue of misclassification of independent
contractors to light.
CONCLUDING THOUGHTS ON THE FUTURE OF MICROSOFT
Microsoft is a solid and profitable company and they need to continue to
focus on new technology and add premium services to increase their overall
footprint inside existing Windows services. Because this is where their
lifetime value goes up. I think Microsoft has this ability and will
continue their growth indefinitely. An example is the launch of Windows 10
and Hololens. Microsoft can incorporate new hardware, services and
applications that set them apart from competition such as Apple, Sony or
Google. Un-savvy customers don't think of these services and their
application end points as apps, but fundamentally core to the Windows
experience. So Microsoft should continue building clients into Windows and
introduce new hardware, products, apps and annuity contracts.
Microsoft must also continue its heavy spending on building out its cloud
computing business, both for its own software like Office 365, Windows 10,
and Hololens and for the IaaS and PaaS services offered through Azure.
These capital investments are necessary to protect Microsoft's software
dominance, and the cloud represents a significant growth opportunity for
Microsoft. Microsoft is spending a lot more on capital expenditures than it
has historically, but it's likely to be money well spent. While the
investments that Microsoft is making will take time to pay off, cloud
revenue is already growing rapidly. "During Microsoft's most recently
reported quarter, revenue from commercial cloud services grew by 147% year
over year, reaching an annual run rate in excess of $4.4 billion. Gross
margin from the "commercial other" segment, which includes commercial cloud
services, more than doubled, as well, with the benefits of scale starting
to drive profitability." (MotleyFool.com)
REFERENCES:
http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics
http://gizmodo.com/5486798/research-and-development-apple-
vs-microsoft-vs-sony
www.microsoft.com/.../TranscriptFY15Q2.docx
http://www.jetro.go.jp/en/invest/reports/newsletter/pdf/ij_20.pdf
Vizcaino v. Microsoft, 120 F.2d 1006 (9th Cir. 1997) (en banc), cert.
den'd, 118 S. Ct. 899
(1998)
http://www.fool.com/investing/general/2014/10/02/heres-why-microsoft-is-
investing-billions-in-the-c.aspx.
http://marketing.linkedin.com/blog/success-story-microsoft-india-increases-
intent-with-linkedin-content-marketing/
-----------------------
Kelly Monegan
[email protected]
Capella University
MBA6016 Finance & Value Creation
Professor Michael Blagg
fINANCIAL aNALYSIS
EXECUTIVE SUMMARY
