financial research report fin 534
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1Financial Research Report
Financial Research Report
Angelo Logan
Strayer University
Professor Jeffery Woo
FIN 534
September 3, 2011
2Financial Research Report
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.
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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).
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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
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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
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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
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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:
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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)
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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
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Common stock and paid-in capital
Balance, beginning of period $62,382 $ 62,849 $ 60,557
Common stock issued 2,311 567 3,504
Common stock repurchased (3,113) (2,611) (3,022)
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)
Common stock repurchased (8,156) (6,039) (9,774)
Balance, end of period (16,681)(22,824)
(26,563)
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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
0 increase 1.16 per year
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
0 increase 1.02 per year
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
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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.
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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
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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
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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
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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