Daniel Lambert

Microsoft Financial Analysis Discussion

Microsoft is a multinational corporation headquartered in Redmond, Washington that
leads in the provision of software products for various computing devices. Its main sources of
revenue derives from software development, hardware sales (particularly the Xbox 360 video
game/entertainment console, Xbox 360 accessories, Kinect for 360 and Personal Computer
hardware), and online advertising.
Over the past three years, Microsoft has seen steady growth in total revenue increasing by
nearly 12 percent in the 2010-2011 period and 5.4 percent in the 2011-2012 period. However,
even though the company generated a record $72.73 billion in total sales for the 2012 fiscal year,
net income declined by 27 percent going from $23.15 billion in 2011 to $16.98 billion in 2012.
Consequently, basic earnings per share fell by an almost identical margin dipping from $2.73 in
2011 to $2.02 in 2012. Furthermore, due to the relatively substantial rise in net income in the
2011 fiscal year, basic earnings per share ascended to $2.73 representing a 28 percent increase
from the previous year.
Between 2011 and 2012, revenue rose 5.4 percent principally because of an increase in
sales of the 2010 Microsoft Office Suite, and Servers and Tools products and services.
Additionally, total revenue also included the proceeds gained from Skype since the date of its
acquisition by Microsoft. Needless to say, this increase in revenue did not translate to an increase
in earnings due to rising costs and operating expenses. Notable increases in operating expenses
include a $2.0 billion (13 percent) rise in cost of revenue. This is due to greater costs associated
with providing Servers and Tools products and services, payments made to Nokia (joint strategy
initiatives), higher royalty costs for Xbox 360 and other revenue related costs. Research and
development expenses totaled 9.8 billion in 2012, signaling a $768 million or 8 percent increase
from the year before. This was due primarily to higher headcount associated costs. Moreover,
general and administrative expenses also went up approximately 8 percenta $347 million
increasedue to higher headcount related costs and a new Puerto Rican excise tax. Overall,
these increased expenses may account for the 27 percent decrease in net income in the fiscal year
2012.
Between 2010 and 2011, revenue rose 12 percent because of strong sales in the Xbox 360
gaming and entertainment platform, the 2010 Microsoft Office Program, Servers and Tools
products and services, and a $254 million Office Deferral in 2010 and recognition of mentioned
Deferral in the fiscal year 2011. Even though operating expenses increased across the board, net
earnings rose 23 percent, inevitably boosting EPS for shareholders.
Material changes in Microsofts balance sheet accounts include a 326 percent increase in
intangible assets in the 2012 fiscal year. This may be due to the acquisition of Skype by
Microsoft. Material changes in the cash flows statement include a significant increase in deferred
income taxes due to a settlement with the IRS, and a substantial decrease in net cash due to the
acquisition of companies(Skype for instance), and purchases of intangible and other assets. It
should also be noted that Microsofts times interest earned ratio has plummeted over the past
three fiscal years highlighting the companys desire to invest its earnings in areas such as
research and development instead of maintaining relatively high interest coverage.
Looking into the future, Microsofts revenue and consequently its stock price is expected
to rise. According to expert forecasts analysts, the companys total sales is expected to reach
approximately $81 billion by 2014, delivering an EPS of around $2.75. This increase may be
attributed to strong potential sales in the soon-to-be released Xbox One gaming and
entertainment system, and continued efforts in software development and advertising.
Furthermore, with the announcement of CEO Steve Ballmers retirement, shareholders anticipate
better management and, as a result, better returns on their investment.