This document provides an investment recommendation for Microsoft Corporation (MSFT). It recommends adding MSFT to the approved issuers list due to its stable fundamentals, diverse product mix, and leadership in software and cloud computing. MSFT generates predictable cash flow from enterprise software and infrastructure solutions. It has a large cash balance that provides strong credit support. The recommendation cites MSFT's strong cash flow, growing cloud business, and stable margins as positives, while noting potential risks from acquisitions and shareholder return programs.

1. 1
Microsoft Corporation
Investment Recommendation
Executive Summary
Investment Recommendation and Thesis
We recommend adding Microsoft Corporation (MSFT) to the
list of approved issuers. We believe that the company is a
stable, defensive name with strong fundamentals. The
company has a diverse product mix of personal computing
hardware and software. Additionally, MSFT sells enterprise
software and infrastructure solutions (SaaS/IaaS) that provide
support for predictable and sustainable cash flow generation.
MSFT is the world’s leader in software and continues to gain
ground in the cloud computing space as they have increased
their cloud computing revenues in the last couple of years.
MSFT will be a defensive credit in the portfolio that is likely to
outperform in weaker credit environments as it is supported by
a massive Cash & Short-Term Investments
balance of over $100B.
Credit Strengths
 Cash flow from operations of $30B per year and FCF of $25B are strong and stable
 As of Q2 FY16, $103B in Cash & Short-Term Investments and net debt of -$60B
 Commercialized cloud business grew 88% YoY to annualized run rate of $8B, and is on
pace for $20B by FY18, with an estimated total addressable market (TAM) of $500B
Primary Credit Risks
 Shareholder returns programs: $17B of share buybacks in FY15 and paying $10B of
dividends per year
 Questionable acquisitions: wrote off $7.5B of Nokia acquisition in 2015
 As of Q2 FY16, $96B of cash and cash equivalents was held by foreign subsidiaries and
would be subject to material repatriation tax effects
Fixed Income Fund
Derek Dukart
Will Pacheco
Punit Pallav
Quinn Sullivan
Zack Turgeon
Date: 4/8/2016
Issue Summary
Ratings: AAA/AA+
Issue: 3.125% 11/03/25
Type: Sr. Unsecured
Call Features: Make whole at
15 until 08/03/25
Amt Outstanding (MM): $3B
Current Position: None
Price: $99.974
YTM: 3.128%
Spread to Tsy: 70 b.p.
OAS
Kamen Dimitrov, Analyst
kdimitrov@csom.umn.edu
612-385-9262
Jessica Hays, Analyst
Jhays1@csom.umn.edu
Phone number?
Investment Thesis
 The recovering telecommunications industry offers
relative value as we seek to expand our portfolio of
individual securities and decrease the use ETFs.
 Verizon Communications, Inc is the most stable
credit in the industry. The company has a high
exposure to the growing wireless sector with its well
established Verizon Wireless service provider. The
company generates sufficient cash flows and has
improved its leverage situation. Its credit ratings
were affirmed on September 28th
by the major credit
agencies. SBC Communications, Inc still derived a
larger part from the riskier wireline industry. The
recently closed acquisition of AT&T Wireless done
by Cingular (SBC Communications and BellSouth
Corp. joint venture) offers many challenges and
uncertainties in the near future. Verizon
Communications, Inc is the credit consistent with the
nature of the Carlson Fixed Income Fund, which
experiences 100% analyst turnover each year.
 Verizon Global Funding Corp offers simultaneous
exposure to both the major telecommunications
sectors – wireline and wireless. Regional Bell
Operating Companies offer limited reporting as
parents move with the SEC to cease individual
filings. This to a great degree would restrain
coverage ability by analysts in the Carlson Fixed
Income Fund environment
 Maturity?
Verizon Global Funding Corp
Recommendation: Buy
CarlsonFixedIncomeFund

2. 2
Company Description
Microsoft, founded in 1975, is one of the world’s largest technology companies and a leading
provider of both PC and server operating systems. The company’s mission is to empower every
person and every organization with platforms and services for a mobile-first, cloud-first world. To
carry out its strategy the company focuses on three interconnected ambitions:
 Productivity and Business Process
 Intelligent Cloud Platform
 Personal Computing
Microsoft integrates all of their products through cloud computing. To support all of the products
and services they offer, the company provides consulting services.
Financial Highlights
Cloud Computing Market:
MSFT has the capability to capitalize on a quickly growing and highly lucrative cloud computing
market. The intelligent cloud business segment is projected to grow at 7% in 2016 and 12% in
2017. Additionally, the operating margins in the cloud segment are strong. In 2014, we saw 39%
and in 2015, 42% operating margins for the cloud segment.
Cash Abroad:
MSFT currently has $94.4B in cash abroad, as noted in the 2015 10K. After repatriating this
cash balance using a 35% tax rate, the cash balance is $61.36B. It is important to note that
MSFT’s cash balance is broken down into cash and cash equivalents ($4.8B in FY2015) and
short-term investments ($96.5B in FY2015).
Short Term Investments Portfolio:
The investment portfolio consists predominantly of highly liquid investment-grade fixed-income
securities diversified among industries and individual issuers. The investments are
predominantly U.S. dollar-denominated securities, but also include foreign currency-
denominated securities in order to diversify risk.
Capital Structure Issues:
MSFT had a total debt/EBITDA ratio of 1.1 in the fiscal year of 2015 and that increased to 1.5 as
operating margins decreased and it issued substantially more debt in the LTM relative to the
previous four years. There is a high probability that its total debt/EBITDA ratio will deteriorate to

3. 3
1.6 debt/EBITDA which may lead to a downgrade. Their net debt, however, is not going to
deteriorate as their operating cash flows are growing so their total cash is growing.
Shareholder Returns Programs:
MSFT has been extremely committed to shareholder returns programs. In FY2015, MSFT
returned $10B in the form of dividends and an additional $18B in share repurchases. Since
2010, dividends have grown at a CAGR of 19% and have totaled more than $40B. Additionally,
through repurchase programs, MSFT has reduced its shares outstanding approximately 10%
since the beginning of 2010. Since MSFT’s cash flows are also growing their buyback program
is not going to impact their net debt.
Acquisitions:
Acquisitions have been evenly paced in the past four years, beginning with the $10B Nokia
acquisition in 2012. This led to a $7.5B write-off last year. In the previous three years, there
have been cumulative acquisitions of over $11B.
Debt Issuance:
Despite the massive cash hoard MSFT has, the company has issued nearly $39B in debt since
2009. The majority of this cash has been used to fund the shareholder returns programs
discussed above. With these issues, MSFT’s total long-term debt has increased to slightly over
$40B. As of Q2 FY16, net debt still remained at a comfortable -$62B. So while the total debt has
been growing their cash and short term investments have also been growing.
Stabilizing Margin Profile Going Forward:
MSFT has been seeing gross margins decline as revenue mix shifts more heavily to the lower
gross margin Intelligent Cloud segment. The margins are going to stabilize in the next couple of
years going forward because of the projected growth in Business & Productivity and Intelligent
Cloud segments.
Industry Analysis
All sections of the cloud -- infrastructure, platform and applications -- should see greater
spending as companies move away from a client-server IT architecture. Greater demand for
connected devices, along with increased cyberattacks, may fuel more security software
spending.

4. 4
Industry Spending:
Technology: Total technology spending has grown at an average rate of 5% a year for the past
five years, but is expected to advance only 2% in 2016 to $2.3 trillion, according to International
Data Corporation (IDC). The decline is primarily driven by saturation in the smartphone segment
and global economic volatility, particularly in emerging markets. Growth is expected to remain in
the low-single digits through 2019. Meanwhile, the IT services and software sectors will maintain
their five-year average growth rates of 3% and 7% through 2019, respectively.
Software: The software industry is forecast to grow 7% annually through 2019 to $570 billion,
driven by an increase in application spending, according to IDC. Cloud and security applications
are expected to be the primary growth drivers in this industry as companies move from on
premise solutions and enhance security. An increase in the number and sophistication of
cyberattacks, combined with concerns on data privacy, are helping to drive this expansion,
making it the fastest growing segment among IT services.
Public Cloud: The public cloud market is undergoing a rapid expansion as new products are
developed across the full spectrum of cloud services. Revenue in this market is forecast to
reach $141 billion in 2019 from $58 billion in 2014, a 19% compound annual growth rate,
according to IDC.
Mobile Device Management: The increased use of personal smart devices in the workplace is
fueling the need for corporate IT managers to safeguard enterprise data while maintaining
privacy for device owners. This is driving demand for enterprise mobility management software,
which corporations use to segregate work from personal data and applications. Mobility
Management Software is expected to grow 15% to $2.9 Billion by 2019.
Valuation
Relative to comparable companies, MSFT bonds have a lower OAS. MSFT has a steeper credit
curve, positioning the longer duration bond as cheaper relative to peers. The lower OAS on
MSFT bonds reflects its stronger credit profile and rating. We believe MSFT presents an
attractive relative value opportunity. We recommend buying the MSFT bond: 3.125% 11/03/25
(circled in red).

5. 5
0.00
20.00
40.00
60.00
80.00
100.00
120.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
OAS
MODIFIED DURATION
TECHNOLOGY
MSFT (Aaa) IBM (Aa3) AAPL (Aa1) ORCL (A1) GOOG (Aa2) Log. ( )
Technicals
Maturity Schedule:
Microsoft has $5 billion, $500 million, and $8.3 billion in debt maturing in 2016, 2017, and 2018.
Of this amount, approximately $10 billion in debt is revolving. Since it has $96 billion in cash and
is generating around $30 billion per year in operating cash flow, these debt maturities pose no
risk to Microsoft.

6. 6
Exhibits
Exhibit 1: Financial Model
1 FY FY FY FY FY LTM FY FY
2 Jun '11 Jun '12 Jun '13 Jun '14 Jun '15 12/31/2015 Jun '16 Jun '17
3 INCOME STATEMENT (millions local)
4 Total Revenues 69,950 73,750 77,654 86,729 92,972 87,632 93,493 100,064
5 growth 13% 5% 5% 12% 7% -6% 1% 7%
6
7 COGS 15,577 17,530 20,249 26,934 33,038 31,708 34,592 37,024
8 Gross Profit 54,373 56,220 57,405 59,795 59,934 55,924 58,901 63,040
9 gross margin 78% 76% 74% 69% 64% 64% 63% 63%
10
11 SG&A 27,205 28,237 30,836 32,013 32,370 31,388 35,269 37,748
12 % sales 39% 38% 40% 37% 35% 36% 38% 38%
13 Operating Income 27,168 27,983 26,569 27,782 27,564 24,536 23,632 25,293
14 op margin 39% 38% 34% 32% 30% 28% 25% 25%
15
16 D&A 2,766 2,967 3,755 5,212 5,957 6,013 5,913 6,509
17 EBITDA 29,934 30,950 30,324 32,994 33,521 30,549 29,544 31,802
18 EBITDA margin 43% 42% 39% 38% 36% 35% 32% 32%
19 growth 14% 3% -2% 9% 2% -9% -12% 8%
20
21 CASH FLOW
22 EBITDA 29,934 30,950 30,324 32,994 33,521 30,549 29,295 31,403
23 Capex (2,355) (2,305) (4,257) (5,485) (5,944) (6,552) (7,000) (7,500)
24 Interest Expense (197) (344) (371) (509) (620) (620) (1,138) (1,414)
25 Cash Taxes (5,300) (3,500) (3,900) (5,500) (4,400) (4,400) (4,472) (4,753)
26 Working Capital Change (3,003) (174) (1,375) 624 1,513 354 938 1,821
27 Other 5,560 4,694 4,155 4,622 (934) 4,695 6,661 6,812
28 Free Cash Flow 24,639 29,321 24,576 26,746 23,136 24,026 24,283 26,368
29
30 Acquisitions (71) (10,112) (1,584) (5,937) (3,723) (1,559) - -
31 Asset Sales - - - - - - - -
32 Dividends (5,180) (6,385) (7,455) (8,879) (9,882) (10,371) (11,670) (12,014)
33 Equity, net change (9,133) (3,116) (4,429) (6,709) (13,809) (17,212) (9,442) (9,329)
34 Other (12,110) (12,380) (17,779) (7,318) (12,457) (10,726) (13,612) (16,072)
35 Net Cash Flow (1,855) (2,672) (6,671) (2,097) (16,735) (15,842) (10,441) (11,048)
36
37 Debt Issued 6,960 - 4,883 10,850 15,161 23,929 13,249 11,000
38 Debt Repaid (1,000) - (1,346) (3,888) (1,500) (7,328) (1,871) (600)
39 Change in Debt 5,960 - 3,537 6,962 13,661 16,601 11,378 10,400
40
41 Change in Cash 4,105 (2,672) (3,134) 4,865 (3,074) 759 937 (648)
43 BALANCE SHEET
44 ASSETS
45 Cash & Short-Term Investments 52,772 63,040 77,022 85,709 96,526 102,640 105,463 114,815
46 ST Assets 22,146 22,044 24,444 28,537 28,186 25,172 28,326 30,303
47 Net Property, Plant & Equipment 8,162 8,269 9,991 13,011 14,731 15,789 16,936 19,043
48 Total Assets 109,683 121,964 143,486 172,384 176,223 180,098 184,511 198,684
49
50 CAPITAL STRUCTURE
51 Cash 1,648 2,019 1,967 8,669 4,819 6,264 5,756 5,108
52 Total Debt 11,921 11,944 15,600 22,645 35,292 44,429 42,936 53,336
53 EV 179,541 208,784 227,403 277,820 290,822 378,891 351,190 346,154
54 EV / EBITDA 6.0 6.7 7.5 8.4 8.7 12.4 12.0 11.0
55
56 Rent expense 525 639 711 874 989 - 1,000 1,000
57 Pension Liability - - - - - - - -
58
59 Total Debt / EV 6.6% 5.7% 6.9% 8.2% 12.1% 11.7% 12.2% 15.4%
60
61 CREDIT METRICS
62 EBITDA / Interest Expense 150.9 89.0 80.7 63.8 53.1 48.3 24.7 21.2
63 (EBITDA - Capex) / Interest Expense 139.0 82.3 69.3 53.0 43.5 37.7 18.6 15.9
64 Total Debt / EBITDA 0.4 0.4 0.5 0.7 1.1 1.5 1.5 1.7
65 Total Rent Adj (8x) Debt / EBITDA 0.5 0.6 0.7 0.9 1.3 1.5 1.7 2.0
66 Total Debt + Pension Liab / EBITDA 0.5 0.6 0.7 0.9 1.3 1.5 1.7 2.0
67 Net Debt / EBITDA 0.5 0.5 0.6 0.6 1.1 1.2 1.5 1.8
68 FCF % of Total Debt 206.7% 245.5% 157.5% 118.1% 65.6% 54.1% 56.6% 49.4%

7. 7
1 MSFT-US AAPL-US SAP-DE ORCL-US ADBE-US
2
3 LTM LTM LTM LTM LTM
4 12/31/2015 Sep '15 Mar '15 Aug '15 Feb '15
5 INCOME STATEMENT (millions local)
6 Total Revenues 87,632 231,880 23,040 37,474 4,740
7 growth -5.7% 0.3% -0.1% -2.0% 0.0%
8
9 COGS 31,708 141,539 7,252 9,565 813
10 Gross Profit 55,924 90,341 15,788 27,909 3,927
11 gross margin 63.8% 39.0% 68.5% 74.5% 82.9%
12
13 SG&A 31,388 22,396 10,347 14,438 3,078
14 % sales 35.8% 9.7% 44.9% 38.5% 64.9%
15 Operating Income 24,536 67,945 5,441 13,471 850
16 op margin 28.0% 29.3% 23.6% 35.9% 17.9%
17
18 D&A 6,013 11,257 1,430 2,726 339
19 EBITDA 30,549 79,202 6,871 16,197 1,189
20 EBITDA margin 34.9% 34.2% 29.8% 43.2% 25.1%
21 growth -8.9% 1.7% 0.6% -5.6% 0.1%
22
23 CASH FLOW
24 EBITDA 30,549 79,202 6,871 16,197 1,189
25 Capex (6,552) (11,488) (705) (1,009) (229)
26 Interest Expense (620) (514) (190) - (56)
27 Cash Taxes (4,400) (13,252) (1,552) - (203)
28 Working Capital Change 354 11,647 (174) 950 264
29 Other 4,695 4,183 (889) (7,316) 276
30 Free Cash Flow 24,026 69,778 3,360 8,822 1,241
31
32 Acquisitions (1,559) (343) (43) (313) (826)
33 Asset Sales - - 372 - -
34 Dividends (10,371) (11,561) (1,456) (1,918) -
35 Equity, net change (17,212) (34,710) 71 (7,747) (647)
36 Other (10,726) (45,193) 142 (2,977) (387)
37 Net Cash Flow (15,842) (22,029) 2,447 (4,133) (619)
38
39 Debt Issued 23,929 29,305 1,934 - 980
40 Debt Repaid (7,328) - (4,259) (2,000) (602)
41 Change in Debt 16,601 29,305 (2,326) (2,000) 378
42
43 Change in Cash 759 7,276 121 (6,133) (241)
45 BALANCE SHEET
46 ASSETS
47 Total Cash & ST Assets 102,640 83,403 12,732 62,122 3,972
48 Net Property, Plant & Equipment 15,789 20,392 2,346 3,896 784
49 Total Assets 180,098 261,894 47,182 109,706 11,008
50
51 CAPITAL STRUCTURE
52 Cash 6,264 32,463 5,550 55,930 3,177
53 Total Debt 44,429 36,403 11,911 42,050 1,902
54 EV 378,891 606,474 96,023 142,871 40,308
55 EV / EBITDA 12 7.7 14.0 8.8 33.9
56
57 Rent expense - - - - -
58 Pension Liability - - - - -
59
60 Total Debt / EV 11.7% 6.0% 12.4% 29.4% 4.7%
61
62 CREDIT METRICS
63 EBITDA / Interest Expense 48.3 153.1 35.1 - 20.2
64 (EBITDA - Capex) / Interest Expense 37.7 130.7 31.4 - 16.1
65 Total Debt / EBITDA 1.5 0.5 1.7 2.6 1.6
66 Total Rent Adj (8x) Debt / EBITDA 1.5 0.5 1.7 2.6 1.6
67 Total Debt + Pension Liab / EBITDA 1.5 0.5 1.7 2.6 1.6
68 Net Debt / EBITDA 1.2 0.0 0.9 (0.9) (1.1)
69 FCF % of Total Debt 54% 192% 28% 21% 65%
Exhibit 2: Comparable Companies

8. 8
Exhibit 3: MSFT Bond Z-Spread
Source: Bloomberg
Exhibit 4: BUSCTE Index
Source: Bloomberg

9. 9
Exhibit 5: MSFT Equity
Source: Bloomberg
Exhibit 6: Debt Maturity Schedule
Source: Bloomberg

10. 10
17%
77%
6%
Capital Structure
Cash Market Capitalization Total Debt
Exhibit 7: Capital Structure
Source: FactSet
Exhibit 8: Operating Segments

11. 11
Exhibit 9: Product Offerings

12. 12
Sales61,98969,95073,75077,65486,72992,97287,63293,493100,064
YoYGrowth5.43%5.29%11.69%7.20%0.56%7.03%
ProductivityandBusinessProcess25,77626,97226,43126,10926,56328,423
YoYGrowth4.64%-2.01%0.50%7.00%
ProductivityandBusinessProcess%ofTotal33.19%31.10%28.43%28.41%28.40%
IntelligentCloud19,74721,73223,71524,43125,37528,420
YoYGrowth10.05%9.12%7.00%12.00%
IntelligentCloud%ofTotal25.43%25.06%25.51%27.88%27.14%28.40%
MorePersonalComputing31,95138,40742,95340,72641,66443,331
YoYGrowth20.21%11.84%-3.00%4.00%
MorePersonalComputing%ofTotal41.15%44.28%46.20%46.47%44.56%43.30%
Jun'14Jun'15LTMJun'16Jun'17
365Days365Days12/31/2015365Days365Days
ProductivityandBusinessProcesses13,94013,08713,54714,496
ProductivityandBusinessProcessesMargins52%50%51%51%
IntelligentCloud8,4439,87110,15011,368
IntelligentCloudMargins39%42%40%40%
MorePersonalComputing6,1505,1795,8336,066
MorePersonalComputingMargins16%12%14%14%
SegmentOperatingIncome
Exhibit 10: Revenue Build
**Segment operating margins are not in-sync with projected financials in Exhibit 1 due to variability in projections.