Microsoft Corp

Microsoft Corp - Financial and Strategic Analysis Review

Publication Date: Sep-2022 Reference Code: GDTC22599FSA

Company Snapshot Company Overview

Key Information Microsoft Corp (Microsoft) develops, licenses, and

supports software products, services, and devices. The
Microsoft Corp, Key Information
company offers a comprehensive range of operating
Web Address www.microsoft.com/en-us systems, cross-device productivity applications, server
Financial year-end June applications, software development tools, business
Number of Employees 2,21,000 solution applications, desktop and server management
NASD MSFT tools, video games, and training and certification services.
Source : GlobalData
It also designs, manufactures and sells PCs, tablets,
gaming and entertainment consoles, and other intelligent
devices.
Key Ratios
Microsoft Corp, Key Ratios
SWOT Analysis
P/E NA
EV/EBITDA NA Microsoft Corp, SWOT Analysis
Return on Equity (%) 43.15 Strengths Weaknesses
Debt/Equity 0.50
Operating profit margin (%) 41.59 Commercial Solutions Driving Legal Proceedings
Dividend Yield 0.73 Growth
Note: Above ratios are based on share price as of 26-Aug-2022
Technological Innovation
Source : GlobalData

Integrated Distribution Model

Share Data
Microsoft Corp, Share Data
Opportunities Threats
Price (USD) as on 26-Aug-2022 268.09
EPS (USD) 8.05 Global Cloud Commuting Competition
Book value per share (USD) 18.88 Market
Shares Outstanding (in million) 7,540 Cyberattacks and Security
Source : GlobalData
Partnerships and Agreements Vulnerabilities

Strategic Acquisitions Foreign Exchange Risks

Performance Chart
Microsoft Corp, Performance Chart (2018 - 2022)
Source : GlobalData

Financial Performance
The company reported revenues of (US Dollars)
US$198,270 million for the fiscal year ended June 2022
(FY2022), an increase of 18% over FY2021. The
operating profit of the company was US$83,282 million
in FY2022, compared to an operating profit of
US$69,903 million in FY2021. The net profit of the
company was US$72,738 million in FY2022, compared
to a net profit of US$61,271 million in FY2021.

Source : GlobalData

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Microsoft Corp

Key Information
Microsoft Corp, Key Information
Corporate Address 1 Microsoft Way, Redmond, WA, Ticker Symbol, Stock MSFT [NASDAQ]
98052, United States Exchange
Telephone +1 425 8828080 No. of Employees 2,21,000
Fax +1 425 7067329 Fiscal Year End June
URL www.microsoft.com/en-us Revenue (in USD Million) ₹ 1,68,088.0
Industry Consumer Goods, Energy and
Utilities, Financial Services,
Pharmaceuticals and Healthcare,
Technology, Media & Telecom
Locations Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Botswana, Brazil, Canada,
Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, Germany, Greece, Hong Kong,
Hungary, India, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Latvia, Luxembourg, Malaysia, Malta,
Mexico, Namibia, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Qatar, Romania,
Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Sweden,
Taiwan, Thailand, Trinidad and Tobago, United Arab Emirates, United Kingdom, United States
Source : GlobalData

Company Overview
Microsoft Corp (Microsoft) develops, licenses, and supports software products, services, and devices. The company offers a
comprehensive range of operating systems, cross-device productivity applications, server applications, software development
tools, business solution applications, desktop and server management tools, video games, and training and certification services.
It also designs, manufactures and sells PCs, tablets, gaming and entertainment consoles, and other intelligent devices. The
company provides a broad spectrum of services including cloud-based solutions, solution support, and consulting services.
Microsoft markets, distributes, and sells offerings through original equipment manufacturers, distributors, resellers, online
marketplaces, Microsoft stores, and other partner channels. The company has business presence across the Americas, Europe,
Asia-Pacific, the Middle East, and Africa. Microsoft is headquartered in Redmond, Washington, the US.

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Microsoft Corp - SWOT Analysis

SWOT Analysis - Overview
Microsoft Corp (Microsoft) is a provider of software and hardware products. Commercial solutions driving growth,
technological innovation, and integrated distribution model are the company’s major strengths, whereas lawsuit remains a
cause for concern. The global cloud computing market, strategic partnerships and agreements, and strategic acquisitions
are likely to offer growth opportunities to the company. However, intense competition, cyberattacks and security
vulnerabilities, and foreign exchange risks could affect its business operations.

Microsoft Corp - Strengths

Strength - Commercial Solutions Driving Growth
Microsoft’s commercial products and solutions reported strong revenue growth in FY2021. Its commercial cloud revenue,
including Microsoft Azure, Microsoft Office 365 Commercial, Microsoft Dynamics 365, the commercial portion of LinkedIn,
and other commercial cloud properties, increased 34% in FY2021 over the previous year. Its Office Commercial revenue
increased 13%, mainly due to 22% growth recorded by Office 365 Commercial. The Dynamics revenue grew 25%, resulting
from 43% growth achieved by Dynamics 365. Azure recorded growth of 50%, which led to 27% growth for server products
and cloud services revenue. Its enterprise services revenue also grew 8% YoY. Gaming revenue increased 33%, which
was mainly driven by 23% growth achieved by Xbox content and services and 92% increase in Xbox hardware revenue.
The company’s revenue increased from US$143,015 million in FY2020 to US$168,088 million in FY2021, an annual
increase of 17.5%. This growth was also due to 10% increase in the Office Consumer revenue. Its operating margin stood
at 41.6% in FY2021, compared to 36.9% in FY2020. The strong operating margin was due to an optimal pricing strategy
and operational efficiency. Microsoft’s operating cost as a percentage of sales declined from 63.1% in FY2020 to 58.4% in
FY2021. It also showcases the company’s ability to create value for shareholders with positive operating cash and to fulfill
obligations towards creditors. Similarly, the company’s return on equity grew from 37.4% in FY2020 to 43.1% in FY2021.

Strength - Technological Innovation

Microsoft Research, the research wing of the company, works towards transforming its portfolio by including emerging
technologies such as artificial intelligence, cognitive solutions, cryptography, data security, networking, and computer
vision. In the area of experiences and devices, it focuses on unifying product ethos across end-user experiences and
devices, including Office, Windows, and enterprise mobility and management. The company focuses on improving
capabilities of its cloud infrastructure by integrating Internet of Things (IoT) and Artificial Intelligence (AI) related solutions
through the development of cloud infrastructure, database, server, management and development tools, AI cognitive
services. Its project HoloLens, the Windows-based holographic computer, is a firm step towards improving its presence in
the Augmented Reality (AR) market. It operates Microsoft Research, which is one of the biggest research organizations in
the world and works with leading universities to propel the best in class in software engineering and a wide scope of
different disciplines. The company’s major R&D facility is in Redmond, the US. It also operates other R&D facilities in other
parts of the US and around the world. At the end of FY2021, it had over 65,000 US and international patents issued and
more than 21,000 pending patents. In FY2021, the company spent US$20,716 million on R&D, which as a percentage of
revenue, stood at 12.3%.

Strength - Integrated Distribution Model

Microsoft markets and distributes its products through three major channels: Original Equipment Manufacturers (OEMs),
direct, and distributors and resellers. The OEMs integrate its software into PCs, tablets, servers, smartphones, and other
intelligent devices and sell directly to end-user. 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
servers and embedded operating systems and applications. The major OEM clients include Dell, Hewlett-Packard, and
Lenovo. The company licenses its products and services through Licensing Solution Partners (LSPs), distributors,
Value-Added Resellers (VARs), system builder channels, and retailers. LSPs sell its products and services to large
organizations; distributors resell to VARs; and VARs cater to small and medium-sized organizations. The company
distributes retail packaged products to independent non-exclusive distributors, authorized replicators, resellers, and retail
outlets. Microsoft distributes hardware products through third-party retailers and Microsoft Stores. It licenses its products
and services directly to several leading organizations through enterprise agreements.

Microsoft Corp - Weaknesses

Weakness - Legal Proceedings
Microsoft is a defendant in a number of patents infringements and legal proceedings. Such legal proceedings may have a
damaging impact on the company’s brand image and decrease consumer confidence. In June 2021, a case was filed
against the company by Parus Holdings Inc (Plaintiff) in the US Federal District Court for the Western District of Texas for
infringing its proprietary voice-browsing and device control technology patent of Parus. The plaintiff alleged that Microsoft
infringes on its patent for voice-browsing and device control technology registered U.S. Patent No. 6,721,705 and seeking
damages against Microsoft for all its infringing sales.

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Microsoft Corp - Opportunities

Opportunity - Global Cloud Commuting Market
Cloud computing has been one of the fastest-growing technology sectors due to the advantages it offers to all types of
businesses. It provides easy and cost-effective solutions to organizations, enabling them to meet their data storage
requirements. At the same time, it reduces their spending on data analytics. According to in-house research, the global
cloud computing industry is forecast to reach US$446,079.3 million by 2025. Software-as-a-Service (SaaS) is the largest
segment of the global cloud computing industry, accounting for 62.2% of the industry's value, followed by
Infrastructure-as-a-Service (IaaS) with 21.9% and Platform-as-a-Service (PaaS) with 15.9%. The US accounts for 32% of
the global cloud computing industry value, followed by Europe with 30.6%, Asia-Pacific with 26.6%, Middle East with 3.5%
and Rest of The World with 7.4%. In May 2022, the company and Volocopter, an urban air mobility firm, entered into a
partnership to develop a Cloud-based system on Microsoft Azure for urban air mobility operations.

Opportunity - Partnerships and Agreements

Microsoft forged various strategic partnerships recently that could help in driving its future growth. In May 2022, the
company partnered with AstridDAO to accelerate business development and growth by removing traditional barriers
involved in building a company. In the same month, the company signed a memorandum of understanding with Oman
Telecommunication Company, to drive its transformation strategy forward. In May 2022, the company integrated with X0PA
Room to make pre-screening highly efficient and effective. In May 2022, the company expanded its collaboration with
BeeKeeperAI, to allow algorithm developers and healthcare data stewards to access BeeKeeperAI. In the same month, the
company and American Airlines entered into a partnership to create a better, more connected experience for customers
and employees. In May 2022, the company and Volocopter entered into a partnership to develop a Cloud-based system on
Microsoft Azure for urban air mobility operations. In the same month, the company, AT&T Inc, and Welbilt collaborated to
help restaurants digitize, simplify and transform their kitchens across the food service industry. In May 2022, the company
announced a new partnership with Citrix to bring new high-definition user experience (HDX) technology integrations into its
Windows 365 Cloud PC service. In the same month, the company entered into a partnership with Nextdoor to display
Nextdoor’s hyperlocal, neighbor-generated content directly within Microsoft properties, including MSN and Microsoft Bing.
In May 2022, the company entered into a partnership with Avaya to deliver Avaya OneCloud solutions on Microsoft Azure.
In the same month, the company, along with Computer Aid and Intel, partnered with Dell Technologies to launch 25
solar-powered community hubs across three continents. In May 2022, the company collaborated with STMicroelectronics to
strengthen the security of emerging Internet-of-Things applications. In the same month, in May, the company entered into a
partnership with Elastic to accelerate adoption of search powered solutions in the cloud.

Opportunity - Strategic Acquisitions

Strategic acquisitions could help the company expand its business operations. In March 2022, the company acquired Minit
J S A, a provider of process mining technology. Through this acquisition, the company expects continuous process
improvement and better operational efficiency. This acquisition will further empower Microsoft to help in digital
transformation and drive operational excellence by creating a complete picture of their business processes. In March 2022,
the company acquired US-based Nuance Communications Inc, a service provider of conversational AI and ambient
intelligence across industries such as healthcare, financial services, retail and telecommunications. Through this
acquisition, Microsoft and Nuance together could bring synergy, which could offer more affordable, effective and accessible
healthcare, and help organizations in every industry.

Microsoft Corp - Threats

Threat - Competition
The globalized nature of software market increases the intensity of rivalry with regard to cost reduction, thereby exerting
greater pressure on profit margins of organizations within the industry. Cloud technology, big data, IoT, medical devices,
and transport and analytics applications have been significant software trends in recent years. Microsoft competes with
Amazon, Google, IBM, Oracle, Salesforce.com, SAP, and VMware in the cloud computing market. It also faces competition
from software and global application vendors, including Cisco Systems, Apple, Google, Facebook, Okta, IBM, Slack,
Proofpoint, and Symantec. Although Microsoft maintains a dominant market position in the desktop business software
market, recent solutions offered by Google Apps for Business provide a credible alternative to Microsoft Office. In the
console segment of the gaming industry, Microsoft’s Xbox faces competition from Sony’s PlayStation and Nintendo’s 3DS.
The higher degree of similarities in their products will lead to price-based competition in these three companies. With entry
of Google into the gaming industry through acquisition of game developers and development of its own cloud gaming
service, Stadia could further intensify rivalry. In May 2022, Apple Inc announced its planr to acquire Canoo, an electric
vehicle company. In May 2022, Google LLC and Samsung entered into a partnership to create Health Connect to make it
easier for apps to sync fitness data.

Threat - Cyberattacks and Security Vulnerabilities

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The constantly evolving cyber threats could disrupt security of the company’s systems and business applications, impair
the ability to provide services to its customers and protect privacy of their data. Hackers and organizations, including
state-sponsored organizations, continuously develop and deploy malicious software or exploit vulnerabilities in hardware,
software, and other infrastructure to gain access to organizations’ networks and datacenters. In case of any cyberattack or
other security incident, hackers could gain unauthorized access to or exfiltration of customers’ data, other external data,
thereby causing loss of confidence of customers in the company’s products and services. According to Internet Crime
Complaint Center’s (IC3) Internet crime report, 2020, IC3 received and processed 791,790 complaints. These complaints
resulted in a loss of US$4.1 billion in 2020. It received an average of over 440,000 complaints per year during last five
years. In 2020, top five crime types were phishing/vishing/smishing/pharming; Non-payment/Non-delivery; extortion;
personal data breach; and identity theft. The IC3 received 68,013 complaints related to tech support fraud, which resulted
in a loss of around US$835 million in 2019. It received 19,369 Email Account Compromise (EAC)/Business Email
Compromise (BEC) complaints with adjusted losses of over US$1.8 billion. The ransomware-related complaints were
2,474, causing an adjusted financial loss of over US$29.1 million. It may also force the company to implement standardized
general IT controls for maintaining physical security of IT infrastructure and personnel, to result in increased operating cost.
The company needs to invest in developing secure products, update software to address security vulnerabilities of its
solutions that help in protecting its internal IT systems and cloud-based services.

Threat - Foreign Exchange Risks

Microsoft operates worldwide and is exposed to fluctuations in foreign exchange rates. The company reports financials in
the US dollar and therefore, its revenue is exposed to volatility of the US dollar against other functional currencies, as it
conducts business operations in over 100 countries. A significant part of its revenue is also denominated in other
currencies such as the Canadian dollar, Japanese Yen, Australian dollar, Euro, and British pound. The major elements
exposed to exchange rate risks include the company’s investments in overseas subsidiaries and affiliates and monetary
assets and liabilities arising from business transactions in foreign currencies. In FY2021, the company reported a gain of
US$873 million from foreign currency translation adjustments, compared with a loss of US$426 million in FY2020. To
minimize risks from currency fluctuations, the company could involve in foreign exchange hedging by entering into foreign
exchange forward contracts. However, there could be no assurance that such measures would limit the impact of
movements in exchange rates on the company’s results of operations.

NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only

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