Financial Analysis and Competition of Microsoft Finance Essay

To enable people and businesses throughout the world to realize their full potential

The company, founded in 1975, has worked to achieve its mission through developing and marketing of software and hardware and providing services and solutions that delivers greater convenience and add value to people's lives. Microsoft's presence is throughout the world with offices in more than 100 countries.

Microsoft generates revenue by developing a larger range of software products and giving support services for various types of computing devices. Few to name are operating systems for various computers, server applications, business solutions applications, software development tools and video games.

It provides support services for its products (customer retention policy) and also gives training to computer system developers. There are a number of Microsoft certified specialized courses. Designing hardware is also a part of their job. Few examples are Xbox 360 gaming, the Zune digital music, and Microsoft personal computer ("PC") hardware products.

It earns revenues through license fee for software, even as it develops and delivers "cloud-based" computing services.

(https://www.microsoft.com/investor/default.aspx )

Examples of cloud-based services which Microsoft currently offers are:

Bing, its Internet search service;

Windows Live Essentials suite, it allows users to upload and organize photos, make movies, communicate via email and messaging and enhance online safety; and

Xbox LIVE service, it enables online gaming, social networking, and content access.

Current cloud-based services (for business users) are:

Microsoft Office Web Apps (online companions to Microsoft Word, Excel, PowerPoint, and OneNote)

Business Productivity Online Suite (Offering communications and collaboration solution)

Microsoft Dynamics Online family of customer relationship management ("CRM") and enterprise resources planning services.

Also, Microsoft is in research and development of advanced technologies. Microsoft believes in delivering breakthrough innovation through their integrated software platform in order to meet their customers need and for future growth opportunity. Microsoft focuses on long term growth by improving customer feedback and delivering new products and services and creating new opportunities for its existing partners. Their prime focus is to build on this foundation.

OPERATING SEGMENTS

Microsoft operates its business in five segments:

Windows & Windows Live

Server and Tools

Online Services

Microsoft Business

Entertainment Devices

These segments are very cleverly chosen. They enable Microsoft to easily achieve its Mission.

Windows & Windows Live Division

The overall responsibility of Windows & Windows Live Division, also termer as "Windows Division", is the development and marketing of the Windows operating system, Windows Live and Internet Explorer. Its revenue growth is mostly correlated with the growth of the PC market, as the original equipment manufacturer ("OEM") distribution channel (e.g., Dell, HP, Lenovo, Compaq, HCL, Sony, Toshiba etc) accounts for approximately 80% of total Windows Division revenue. Some of the factors impacting OEM revenue are:

Hardware market changes

Promotions and pricing changes: Due to variation associated with OEM channel shifts - from local system builders to large, multinational OEMs.

Windows Division offerings

Premium Operating systems. Those which contain additional functionality (above standard) and are sold at premium rate

Online software and services made available through Windows Live.

Versions of Windows operating system:

Windows 7, Windows Vista, Windows XP Home and other older versions as Windows 98, Windows 2000 etc.

Competition

The competitors for Windows operating system are various commercial software products available in the market, offered by some of the well-established companies, including Apple and Google, and from the Linux operating system. Now, Linux (derived from Unix) is available to its users free of any charges. It is one of the first of its kind " Open Source" operating system.

Some other competitors for Microsoft are:

Apple

Google

Mozilla

Opera Software Company

All of the above offers browsers in competition to Windows Internet Explorer.

Server and Tools

Server and Tools segment develops and markets and provideservices and solutions around

Server software

Software developer tools

Products and Services:

Windows Server operating system

Windows Azure

Microsoft SQL Server

SQL Azure

Visual Studio

Silverlight

System Center products

Biz Talk Server

Microsoft Consulting Services

Premier product support services

Competition

Computer manufacturers such as Hewlett-Packard, IBM, and Oracle are major players along with Microsoft in this field.

Online Services Division

The Online Services Division ("OSD") includes online information offerings. Examples are Bing, MSN portals and channels. Microsoft majorly earns revenue from online advertising, including search, display, and advertiser and publisher tools.

Products and Services: Bing

Microsoft adCenter

MSN and Atlas online tools (advertisers and publishers).

Competition

Major competitors for OSD division are Google, Yahoo!, and many other Web sites that provide content and online ad offerings to its users.

Microsoft Business Division

Microsoft Business Division ("MBD") majorly revolves around the following two:

Microsoft Office system

Microsoft Dynamics business solutions.

90 % revenue of Microsoft Business Division is from Microsoft Office System.

Products and Services:

Microsoft Office

Microsoft SharePoint

Microsoft Dynamics ERP and CRM

Microsoft Office Web Apps

Competition

Competitors to the Microsoft Office system include Corel, Adobe, Apple, Google, IBM, Novell, Oracle, Red Hat, Zoho, and other local application developers in Europe and Asia. Infor and Sage compete with Microsoft's Dynamic Business solution in both small and midsized markets. Oracle and SAP are solution providers to large size organizations.

Entertainment and Devices Division

The Entertainment and Devices Division is responsible for developing and marketing: the Xbox 360 platform which includes the Xbox 360 gaming and entertainment console with accessories, third-party games, and Xbox LIVE services.

Products and Services: Xbox 360 console and games; Xbox LIVE; Windows Phone; Windows Embedded device operating system; and numerous consumer software and hardware products (such as Mac Office, mice, and keyboards); and Windows Automotive.

Competition

Competitors of entertainment and devices vary in size from very small companies to very large corporations (with substantial financial and marketing resources). Microsoft's Xbox gaming and entertainment business competes Nintendo and Sony.

Windows Phone faces competition from a large number of players across the globe. Few to name are Apple, Google, Nokia, QUALCOMM, Research In Motion, and Symbian.

(https://www.microsoft.com/en/us/sitemap.aspx)

FINANCIAL HIGHLIGHTS

Includes $1.25 billion of convertible debt securities issued in June 2010 and $3.75 billion of debt securities issued in May 2009. See Note 12 - Debt in the Notes to Financial Statements.

(b) Includes $3.75 billion of debt securities issued in May 2009. See Note 12 - Debt in the Notes to Financial Statements.

(c) Includes charge of $1.4 billion (899 million) related to the fine imposed by the European Commission in February 2008.

(All figures in Million)

(Source Annual report, Microsoft Corporation, 2010)

Financial Ratios:

Current Ratio: Total current Asset / Total Current Liability

= $ 55,676 m / $ 26, 147 m

= 2.13

This is also termed as working capital ratio. This ratio gives an idea of how well the company is in a position to pay back its liabilities (short term vs. long term). Compared to Microsoft's ratio, Google has a Current ratio of around 10 followed by Adobe, which has a ratio of around 3.5.

Quick Ratio: ( current Asset - Inventory ) / Current Liability

= ($ 55,676 - $ 740) m / $ 26, 147 m

= 2.1

Quick ratio tells a company's ability to meet its short term liabilities with its most liquid assets. Compared to Microsoft's ratio, here again, Google has a Current ratio of around 12 followed by Adobe, which has a ratio of around 4

Cash Ratio: Total Cash / Current Liability

= $ 36,788 m / 26,147 m

=1.4

Debt to Equity ratio : (Short term debt + long term debt)/ Total stakeholders equity

= $ 5,939m/ $ 46,175 m

= 0.128

Here, amongst Microsoft's competitors, Dell has the highest Debt to Equity ratio of 4.It measures a company's financial leverage by dividing its liabilities to stake holders equity.

Financial Leverage : Total Asset / Total Equity

=$ 86,113 m / $ 46,175 m

= 1.86

Net Profit Margin : Net income / Net revenue

= $ 18,760 m / $ 62,484 m

=0.30

Return On Asset (ROA) : Net income / Average total asset ( average of current year and previous year)

= $ 18,760 m / $ 82,000 m

=0.228

=22.8%

ROA for Microsoft is highest amongst its competitors followed by google, which has around 19%.It says, how profitable a company is relative to its assets. This makes Microsoft a better investment option for investors.

Return On Equity (ROE): Net Income / Average total Equity ( Average of current year and previous year)

=$ 18,760 m / $ 42,866 m

=0.437

(All calculations are based on financial results of Microsoft for 2010, available at public domain of Microsoft, for its stakeholders)

Balance Sheet

(In millions)

A company finances its assets through issue of bonds and stocks.

Bonds: Bond is a debt instrument. Through bonds, an investor lends money to an entity (corporate or governmental). In return the entity pays the lender a fixed amount of interest. Bonds are issued for a defined period of time.

Stocks: Stocks represent the original capital invested by the founders of the company. Later, stocks are divided into shares, having a certain face value. Now, there are two types of stocks, Common stock and Preferred stock. A common stock carries voting rights where as a preferred stock typically does not carry voting rights.

Using these two instruments, a company can raise any amount of money to finance its assets.

A company, since has many means of financing its assets, it also has a number of obligations to meet. A company usually splits its liabilities into short term (current liability) and long term. A liability must be settled through the payment of an asset in some time in future. A liability which is expected to be liquidated with in a company's operating cycle or one year is called short term liability. Now, any other left over liability which is not expected to be paid in a year are termed as long term liability.

( Bragg.M. Steven., The ultimate accountants reference, 2nd edition, 2006)

 

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