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Financial Research Report Angelo Logan Strayer University Professor Jeffery Woo FIN 534 September 3, 2011

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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 companys operations, locations, markets, and lines of business. Financial statements for the past three years will be discussed along with ratio analysis. The companys common stock price will also be analyzed for the past five years and compared to the Standard & Poors 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 Microsofts 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 Microsofts 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 Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long Term Asset Charges Total Assets Liabilities 2009 2008

9,610,000 43,162,000 17,454,000 1,372,000 3,320,000 74,918,000 10,865,000 8,162,000 12,581,000 744,000 1,434,000 108,704,000

5,505,000 31,283,000 15,198,000 740,000 2,950,000 55,676,000 7,754,000 7,630,000 12,394,000 1,158,000 1,501,000 86,113,000

6,076,000 25,371,000 13,405,000 717,000 3,711,000 49,280,000 4,933,000 7,535,000 12,503,000 1,759,000 1,599,000 279,000 77,888,000

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Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities Stockholders' Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets Currency in USD.

9,560,000 19,214,000 28,774,000 11,921,000 8,072,000 2,854,000 51,621,000

8,564,000 1,000,000 16,583,000 26,147,000 4,939,000 7,445,000 1,407,000 39,938,000

8,889,000 2,000,000 16,145,000 27,034,000 3,746,000 6,269,000 1,281,000 38,330,000

63,415,000 62,856,000 62,382,000 (6,332,000) (16,681,000) (22,824,000) 57,083,000 43,758,000 46,175,000 32,623,000 39,558,000 25,296,000

INCOME STATEMENTS
(In millions, except per share amounts) 2010 2009 $ 58,437 2008 $ 60,420

Revenue Operating expenses: Cost of revenue Research and development Sales and marketing

$ 62,484

12,395 8,714 13,214

12,155 9,010 12,879

11,598 8,164 13,260

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General and administrative Employee severance Total operating expenses Operating income Other income (expense) Income before income taxes Provision for income taxes Net income Earnings per share: Basic Diluted Weighted average shares outstanding: Basic Diluted

4,004 59 38,386

3,700 330 38,074

5,127 0 38,149

24,098 915 25,013 6,253

20,363 (542) 19,821 5,252

22,271 1,543 23,814 6,133 $ 17,681

$ 18,760 $ 14,569

$ 2.13 $ 2.10

$ 1.63 $ 1.62

$ 1.90 $ 1.87

8,813 8,927

8,945 8,996 $ 0.52

9,328 9,470 $ 0.44

Cash dividends declared per common share $ 0.52 CASH FLOWS STATEMENTS
(In millions)

2010

2009

2008

Operations Net income Adjustments: Depreciation, amortization Stock-based compensation

2,673 1,891 2,562 1,708 2,056 1,479 $ 18,760 $ 14,569 $ 17,681

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Net recognized losses (gains) on investments and derivatives Excess tax benefits from stock-based compensation Deferred income taxes Deferral of unearned revenue Recognition of unearned revenue Changes in operating assets and liabilities: Accounts receivable Other current assets Other long-term assets Other current liabilities Other long-term liabilities Net cash from operations Financing Short-term borrowings (repayments), maturities of 90 days or less, net Proceeds from issuance of debt, maturities longer than 90 days Repayments of debt, maturities longer than 90 days Common stock issued Common stock repurchased Common stock cash dividends paid Excess tax benefits from stock-based compensation Other Net cash used in financing Investing

(208)

683 (52) 762 24,409 (25,426)

(572) (120) 935 24,532 (21,944)

(45) (220) 29,374 (28,813)

(2,238) 420 (223) 1,295 1,407 24,073

2,215 (422) (273) (3,371) 1,673 19,037

(1,569) 153 (98) (748) (173) 21,612

(991) 4,167 (2,986) 2,311 (11,269) (4,578) 45 10 (13,291)

1,178 4,796 (228) 579 (9,353) (4,468) 52 (19) (7,463)

0 0 0 3,494 (12,533) (4,015) 120 0 (12,934)

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Additions to property and equipment Acquisition of companies, net of cash acquired Purchases of investments Maturities of investments Sales of investments Securities lending payable Net cash used in investing Effect of exchange rates on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

(1,977) (245) (30,168) 7,453 15,125 (1,502) (11,314) (39) (571) 6,076 $ 5,505

(3,119) (868) (36,850) 6,191 19,806 (930) (15,770) (67) (4,263) 10,339 $ 6,076

(3,182) (8,053) (20,954) 2,597 25,132 (127) (4,587) 137 4,228 6,111 $ 10,339

STOCKHOLDERS EQUITY STATEMENTS

(In millions) 2010 2009 2008

Common stock and paid-in capital Balance, beginning of period Common stock issued Common stock repurchased Stock-based compensation expense Stock-based compensation income tax benefits (deficiencies) Other, net Balance, end of period $ 62,382 $ 62,849 2,311 (3,113) 1,891 (647) 32 62,856
567 (2,611) 1,708 (128) (3) 62,382 $ 60,557 3,504 (3,022) 1,479 253 78 62,849

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Retained deficit Balance, beginning of period Cumulative effect of a change in accounting principle relating to uncertain tax positions Cumulative effect of a change in accounting principle relating to costs of certain compensated absences Net income Other comprehensive income: Net unrealized gains on derivatives Net unrealized gains (losses) on investments Translation adjustments and other Comprehensive income Common stock cash dividends Common stock repurchased Balance, end of period Total stockholders equity Ratio Analysis Current Trend and ratio analysis (Using the average method)
2008 49,280,000 1,759,000 27,034,000 38,330,000 57,083,000 13,260,000 23,814,000 17,681,000 2 2009 55,676,000 1,158,000 26,147,000 39,938,000 46,175,000 12,879,000 19,821,000 14,569,000 2 2010 74,918,000 744,000 28,774,000 51,621,000 39,558,000 13,214,000 25,013,000 18,760,000 2 Current trend increase 1.23 per year decrease 1.53 per year increase 1.03 per year increase 1.16 per year decrease 1.20 per year decrease 0.98 per year increase 1.02 per year increase 1.03 per year 2 27 265 (206) 18,846 (4,547) (8,156) (16,681) $ 46,175 302 (233) (240) 14,398 (4,620) (6,039) (22,824) $ 39,558 18 (653) 121 17,167 (4,084) (9,774) (26,563) $ 36,286 (22,824) 0 (26,563) 0 (29,460) (395)

0 18,760

0 14,569

(17) 17,681

Current Assets Fixed Assets Current Liabilities Long-term liability Owners Equity Sales Revenues EBIT Net Income Earnings Per Share

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Future Trend and ratio analysis projected for three years (Using the average method)
2011 2012 2013 92,149,140 113,343,442 139,412,433 486,274 317,826 207,729 29,637,220 30,526,336 31,442,126 59,880,360 69,461,217 80,575,012 32,965,000 27,470,833 22,892,361 12,949,720 12,690,725 12,436,911 25,513,260 26,023,525 26,543,995 19,322,800 19,902,484 20,499,558 2 2 2

Future Assets Fixed Assets Current Liabilities Long-term liability Owners Equity Sales Revenue EBIT Net Income Earnings Per Share

Stock Price Analysis Microsoft common stock for the past 5 years

After reviewing Microsofts 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

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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

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

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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.

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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