Microsoft was founded in 1975 by Bill Gates and Paul Allen to produce software for computer company Altair. By 1979, sales surpassed $1 million and Microsoft licensed its operating system to IBM in 1981. Today, Microsoft is a leading technology company specializing in software and services with a brand value of $104.9 billion. The company generates most of its revenue from Office 365 subscriptions and cloud computing services. Microsoft has transitioned its focus from hardware to software and services, which has increased profit margins. It remains financially stable with high liquidity and returns.

1. Microsoft Co.
An Analysis By: Andrew Hasson, Ryan Convery,
Jason Man

2. Albuquerque, 1975
● Bill Gates & Paul Allen founded Micro-
Soft (Microprocessors & Software) on
April 4th, 1975
● Initially, Gates and Allen built software
for computer company Altair, then
moved to Washington to build their own
● By 1979, Sales surpassed
one million dollars and in
1981 licensed the Microsoft
Operating System to IBM
Computers

3. Microsoft Today
● Today, Microsoft is one of the world’s most
recognized tech brands specializing in software,
business solution services, hardware computers, as
well as video game consoles.
● Forbes ranks Microsoft 3rd in most valuable brand in
the world with a brand valuation of 104.9 Billion
dollars!

4. Current Board Members
Satya Nadella
● CEO
● 2014-Present
John Thompson
● Chairman
● 2012-Present

5. How Microsoft Generates Revenue
*Data Taken from Microsoft 2018 Annual Report

6. Office 365 Subscriptions
● By the end of 2018, Microsoft had
roughly 34.1 Million subscribers for
their Office 365 Consumer services
● If Office 365 were a country, it would
have the same population as
Mozambique

7. ● World Population of: 7.6 billion
population (2018)
● 34.1 million Office subscribers
● 1 in 223 people are subscribed
● Estimated 74.1% of World Population
are ages 15 and up
● 1 in 165 people are subscribed
Office Subscribers vs World Population

8. Firm Trends - Product Shift
● Based on data from Microsoft’s
recent fiscal years:
○ Microsoft is focusing increasingly on
Office and Cloud Computing
○ Shifting focus away from its other
products (hardware, electronics)
● Software-focused going forward
*Data Taken from Microsoft 2018 Annual Report

9. Firm Trends - Profit Margin
● Microsoft’s Profit Margin
steadily increasing over recent
years
● Impact from software shift
○ Software has little to no COGS
*Data Taken from Microsoft 2018 Annual Report

10. Firm Trends - Expenses
● R&D fluctuates
● SG&A going down
● Impact from software shift
○ Less SG&A needed

11. Financial Overview
● Liquidity ratios show that Microsoft is
capable of paying off its current
liabilities
● The Capital Structure of Microsoft
shows its being finance with more and
more debt than equity
● ROE has decreased because of a
sharp decline in Profit Margin and
Microsoft’s increase in leverage
Year 2016 2017 2018
Liquidity
Current Ratio 2.35 2.92 2.90
Quick Ratio 2.31 2.88 2.86
Cash Ratio 0.11 0.14 0.20
FCF Growth 7.98% 25.60% 2.79%
Capital Structure
D/A 62.79% 64.96% 68.04%
E/A 37.21% 35.04% 31.96%
ROE (DuPont)
Profit Margin 22.53% 26.39% 15.02%
TAT 0.47 0.39 0.43
Equity Multiplier 2.69 2.85 3.13
ROE (DuPont) 28.53% 29.06% 20.03%

12. Pro Forma - Income Statement
Assumptions: Income Statement Pro Forma
used percentage of sales method; Using a
6.63% Growth rate in revenue based off the
average growth rate in the previous three
years.

13. Pro Forma - Balance Sheet
Assumptions: Based as a % of Total Assets; Total Assets grew 14%
annually based on the average growth rate of assets in the previous
3 years.
● Current Ratio: 2.86
● Quick Ratio: 2.81
● LTD to Assets: 30%
● Inventory Turnover: 9.69
● Days Inventory: 37.64
● Total Liabilities to Assets: 68%
● Total Equity to Assets: 32%

14. Pro Forma - Statement of Cash Flows
Positive Total Cash Flows increasing
by about 12% annually.
The continuing decline in CF for
Investment activities indicates that
Microsoft is heavily investing in new
technologies for the future.
We would categorize Microsoft as right
in between the growth and maturity
phase of its life cycle.

15. Competitors
Microsoft’s main competitors are:
● Apple (AAPL)
○ Revenue 2018: $265 Billion
○ PM 2018: 22.26%
● Google (GOOG)
○ Revenue 2018: $136 Billion
○ PM 2018: 22.79%
● IBM (IBM)
○ Revenue 2018: $79 Billion
○ PM 2018: 7.59%
● Oracle (ORCL)
○ Revenue 2018: $39 Billion
○ PM 2018: 10.26%

16. Key Ratios
● Great short-term liquidity prospects
● Is not extremely asset heavy for its
sales
● Displays great returns on its assets
and equity

17. Stock Performance (10 years)
Graph

18. Ratio Analysis - P/E Ratio
● Microsoft has the second highest P/E
ratio of its chosen competitors
● Has grown from 14.51 to 28.06 in 5
years
● Shows investors optimism for the
company’s growth
● Indicates the company’s growth
prospects looks great compared to
competitors

19. Should We Invest?
Yes
● Tech Industry continues to grow over time
● Stock performance steadily increasing
● 3rd most valuable brand in the world
● Diverse array of products: Both hardware and software
● 2nd highest P/E ratio compared to competitors

20. Questions?

21. Sources
● FactSet
● https://www.forbes.com/powerful-brands/list/
● https://www.microsoft.com/en-us/annualreports/ar2018/annualreport
● https://data.worldbank.org/indicator/sp.pop.0014.to.zs
● https://www.capitaliq.com/CIQDotNet/Financial/Ratios.aspx?CompanyId=21835