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John Ducas September 10 2016 ___________________________________________________________________________ _______________

Microsoft ($MSFT) Analysis

Table of Contents

Executive Summary...................................................................................................................... 2

Description of the Business .......................................................................................................... 3 Segments ................................................................................................................................. 3

More Personal Computing.................................................................................................... 4 Productivity and Business Processes ..................................................................................... 4 Intelligent Cloud .................................................................................................................. 5

Management ........................................................................................................................... 5

Key Statistics................................................................................................................................ 5

Track Record ................................................................................................................................ 8 Profitability.............................................................................................................................. 8 Dividend and Share Repurchase Policy...................................................................................... 9

Growth Factors .......................................................................................................................... 10 Cloud Computing ................................................................................................................... 10 Growth of Microsoft Enterprise Ecosystem ............................................................................. 11 Office 365 and the Subscription-Based Revenue Model ........................................................... 11

Valuation ................................................................................................................................... 12 Trading Comps ....................................................................................................................... 12 Discounted Cash Flow ............................................................................................................ 13

LinkedIn Acquisition ................................................................................................................... 14

Risks .......................................................................................................................................... 15 Macro Conditions................................................................................................................... 15 Competition Amongst Technology Companies ........................................................................ 15

Conclusion ................................................................................................................................. 16

Collated Annual Financial Data Since 2008 .................................................................................. 16 Income Statement.................................................................................................................. 16 Balance Sheet ........................................................................................................................ 18 Cash Flow .............................................................................................................................. 21

Disclaimer.................................................................................................................................. 23

References................................................................................................................................. 23


Executive Summary Following Microsoft’s recent fourth quarter earnings results, the company has proven that it can

continue to stay relevant in the face of a changing tech industry. Recent initiatives, including a

company-wide switch towards Cloud computing and away from the old software-driven business

model pioneered by Bill Gates, have asserted Microsoft as a leader in the mobile -centric world we

currently live in.

Based on my assumptions, Microsoft currently trades at an 13% discount to intrinsic price of $64.

While it presents potential for substantial capital gains, the stock yields an attractive and ever-

increasing quarterly dividend of 36 cents per share. The factors listed below contribute to my belief

that MSFT will not only reach its conservative intrinsic price but also top it.

Increased valuation when Satya Nadella decides to report Cloud revenues separately.

Value driven from LinkedIn acquisition, which is yet to be priced into the stock , as well as

synergies from Office 365 which will lead to greater LinkedIn adoption and Office

engagement.

Higher margins resulting from adoption of subscription-based model.

Abundant free cash flow it can use to enhance shareholder value through higher dividends

and greater share buybacks.

Greater free cash flow from scale-backs in capital expenditures as buildout of Azure Cloud

platform nears an end.

Additional revenue generated from cost-savings resulting from transformation into a fully-

fledged digital company.

Dividend hike in Q4 2016.

Though I do believe Microsoft provides an attractive proposition from a reward to risk point of view,

other factors, such as macroeconomic instability and broad-market “frothiness”, do lead me to

conclude that an investor should wait for a pullback before beginning to build a position. However,

unlike other technology businesses that rely on a steady and growing amount of purchases of products

like smartphones or computers, Microsoft, through its growing reliance on enterprise customers, is

better suited to mitigate any incoming macro headwinds, whether it be a strengthening dollar or

falling asset prices.


Description of the Business

Segments

In February of 2014, Microsoft CEO Steve Ballmer was replaced by Satya Nadella, a VP who previously

led the company’s Cloud and Enterprise division. That switch foreshadowed the direction Microsoft

would end up taking and represented a definite move away from the software -oriented business

model to one with a focus on enterprise and Cloud services. Under the new business model, Microsoft

operates under three segments “More Personal Computing”, “Productivity and Business Processes”

and “Intelligent Cloud” (by order of revenue). Satya Nadella’s vision for Microsoft is clearly outlined

by the following sentences:

I want to reflect on the opportunity ahead of us. Simply put, businesses will not

just use digital technologies, but they will become digital companies. This

generates enormous opportunity for Microsoft and our partners. We are the ones

who can empower digital transformation across all industries, companies, and

geographies with our technology and platforms.

27%

26%

47%

Segment Revenue FY 2016

Productivity and BusinessProcesses

Intelligent Cloud

More Personal Computing


While “More Personal Computing” continues to be Microsoft’s largest segment by revenue, totaling

over $40.46 billion in 2016, followed by “Productivity and Business Processes” at $26.49 billion, and

“Intelligent Cloud” at $25.04 billion.

More Personal Computing

Currently the greatest revenue generator, More Personal Computing consists of Windows, including

Windows OEM licensing, Microsoft devices such as the Microsoft Surface and phones, Gaming

products like the Xbox console, and search advertising. The Computing segment mainly deals with

Microsoft’s “legacy” business. Satya Nadella has already begun to sell off parts of the group in the

hope of reallocating capital and efforts to the development of the Cloud segment. One of the key

products of the Computing segment is Windows 10, which launched in June 2015. Unlike its previous

iterations, the new operating software has been designed to function on a broad range of devices,

from desktop PCs to Microsoft’s Surface tablet. This has increased adoption of the platform and

fulfilled the goal of turning Microsoft into an enterprise-focused services provider. The next step for

the company is to build out the Cloud service offerings on the Windows platform.

Productivity and Business Processes

The Productivity and Business Processes segment remains the second largest segment by total sales,

and comprises of Office 365 (commercial and consumer), Skype, Outlook.com, OneDrive and

Dynamics business solutions. Office 365 is now offered on a subscription basis, which allows access to

all its products, including Word, Powerpoint, Excel, OneDrive and Skype. By providing the suite of

productivity offerings online, Microsoft has adopted a rolling release model, whereby it updates the

products on a regular basis. Furthermore, Microsoft has made a distinction between Office for

business use and for personal use, by allowing consumers to enroll in either Office Commercial or

Office Consumer. In itself, the company continues to incorporate the Cloud in its software as to

provide customers access to their files from any of their devices.


Intelligent Cloud

The Intelligent Cloud segment generated the least amount of revenue amongst the three groups in

2016 but was at the same time the fastest growing division. While it only brought in $25 billion, Cloud

computing has become Microsoft’s new focus under CEO Satya Nadella. Through this segment,

Microsoft provides Cloud storage solutions for households and businesses alike. More information

under “Growth Factors - Cloud Computing” on page 10.

Management

Microsoft is currently led by Satya Nadella, a CEO who has already proven his worth through his plans

to move the company beyond its “legacy” business and adopt a more current and “Cloud-centric”

business model. Unlike the last CEO’s largely unpopular acquisition of Nokia, which led to significant

write-downs and the eventual sale of the majority of the business, Nadella has taken Microsoft in a

different direction and on a path geared towards enterprise solutions, as seen by the recent

acquisition of LinkedIn. This move already bore fruits as was shown through the revenue spike in the

“Intelligent Cloud” and “Productivity and Business Processes” segments.

Key Statistics

Stock Price Performance

1 Month Price Returns (Daily) 10.9369



Year to Date Price Returns (Daily) 4.5782

1 Year Price Returns (Daily) 22.5861

3 Year Price Returns (Daily) 77.4312

52 Week High (Daily) 58.5

52 Week Low (Daily) 39.72

52 Week High Date 8/09/16

52 Week Low Date 8/24/15

Dividends and Shares

Shares Outstanding 7792.5156

Dividend 0.36

Dividend Yield (Forward) 2.48

Dividend Yield (TTM) 2.394461912

Cash Dividend Payout Ratio (TTM) 44.0557

Payout Ratio (TTM) 66.7192

Dividend Date 9/08/16

Ex-Dividend Date 8/16/16


Estimates

Sales Estimates for Current Quarter 21537.655

Sales Estimates for Current Fiscal Year 93328.824

EPS Estimates for Current Quarter 0.68

EPS Estimates for Current Fiscal Year 2.89

PE Ratio (Forward) 20.09068278

PE Ratio (Forward 1y) 17.96378361

PS Ratio (Forward) 4.82929576

PS Ratio (Forward 1y) 4.566660031

Income Statement

Revenue (TTM) 85320

Revenue (Per Share Quarterly) 2.5998

Revenue (Quarterly YoY Growth) -7.0604

EPS Diluted (TTM) 2.06

EPS Diluted (Quarterly YoY Growth)

Net Income (TTM) 16496

EBITDA (TTM) 27723

Balance Sheet

Total Assets (Quarterly) 193694

Cash and Short Term Investments (Quarterly) 113240

Book Value (Per Share) 9.2209

Tangible Book Value (Per Share) 6.4539

Total Liabilities (Quarterly) 121697

Non-Current Portion of Long Term Debt (Quarterly) 40783

Total Long Term Debt (Quarterly) 53687

Shareholders Equity (Quarterly) 71997

Cash Flow Statement

Cash from Financing (TTM) -8393

Cash from Investing (TTM) -23950

Cash from Operations (TTM) 33325

Capital Expenditures (TTM) 8343

Profitability

Gross Profit Margin (Quarterly) 61.2933

Profit Margin (Quarterly) 15.145

EBITDA Margin (TTM) 32.493

Operating Margin (TTM) 23.6545


Management Effectiveness

Asset Utilization (TTM) 0.4724

Days Sales Outstanding (Quarterly) 67.5588

Days Inventory Outstanding (Quarterly) 26.881

Days Payable Outstanding (Quarterly) 84.0016

Receivables Turnover (Quarterly) 1.3507

Return on Assets (TTM) 9.1337

Return on Equity (TTM) 21.642

Return on Invested Capital (TTM) 13.7586

Current Valuation

Market Cap 452355.5306

Enterprise Value 392568.7551

PE Ratio (TTM) 28.17956308

PEG Ratio (TTM) 0.719071613

Earnings Yield (TTM) 3.548665116

PS Ratio (TTM) 5.44441365

Price to Book Value 6.282947001

EV to Revenues (TTM) 4.6011

EV to EBITDA (TTM) 14.1604

EV to EBIT (TTM) 18.6043

Operating PE Ratio (TTM) 23.01639478

Operating Earnings Yield (TTM) 4.344753488

Liquidity and Solvency

Current Ratio (Quarterly) 2.3529

Debt to Equity Ratio (Quarterly) 0.7457

Free Cash Flow (Quarterly) 5809

Tangible Common Equity Ratio (Quarterly) 29.2825

Employee Count Metrics

Total Employees (Annual) 114000


Track Record

Profitability Microsoft has a market capitalization of $430 billion and enterprise value of $370 billion. An important

development witnessed in the most recent earnings report is the large jump in cash flow. Historically

speaking, Microsoft has been a large beneficiary of cash. Given that software companies derive much

of their value from intangible assets, cash is a crucial plus when evaluating a company and its future

prosperity.

In the last quarter, cash flow from operations was $8.5 billion, up 25% from the previous year. This

represents cash flow margin of 37%, from 32% the year before. Due to a massive buildout of the Azure

Cloud infrastructure, higher capital expenditures of 50% took a toll on free cash flow, which grew by

15% to $5.8 billion. Nevertheless, Microsoft remains an incredibly profitable enterprise, especially

when compared to some of its peers. As seen below, Microsoft generates 21.54% return on equity,

outpacing many of its competitors. While Apple has a higher ROE of 37.92%, much of this can be

attributed to its large debt burden of $107.58 billion, nearly double that of Microsoft’s which stands

at $68.20 billion.


Dividend and Share Repurchase Policy

Microsoft has a long history of seeking to enhance shareholder value, as witnessed by the following diagram.

Since 2006, the company has increased its dividend payout consistently and on a regular basis,

doubling in just five years. The current dividend stands at $1.44 annually but is widely expected to be

increased in the fourth quarter of 2016. While this rise will most likely take place, the question remains

by how much. In the past five years, Microsoft has regularly raised its dividend by double digit

percentages, typically from 11% to 25%, with last year’s raise per quarter standing at 15%.

Something important to note is that much of Microsoft’s cash is held outside the United States, and

given only domestic funds can be used to issue dividends and share buybacks, the company has been

forced to borrow significant amounts of capital (now totaling $68.20 billion following the LinkedIn

acquisition). This hasn’t had a negative impact on its balance sheet as it continues to hold on to over

$63 billion in net cash with sufficient working capital. However, the debt burden, especially taken on

following the major acquisition of LinkedIn, will limit the amount by which Microsoft increases its

dividend. I constructed a table below that shows a range of pote ntial dividend hikes taking into

account historical trends, recent bond issues and the limit imposed by the recent acquisition.

New Dividend Increase % Total for Year Yield (based on $57.50 share price)

$0.375 4.2% $1.50 2.61% $0.380 5.6% $1.52 2.64%

$0.385 6.9% $1.54 2.68%

$0.390 8.3% $1.56 2.61%

$0.395 9.7% $1.58 2.64%

$0.400 11.1% $1.60 2.68%

$0.405 12.5% $1.62 2.61%

$0.410 13.9% $1.64 2.64%

$0.415 15.3% $1.66 2.68%


Regardless of the amount, Microsoft will surely raise its dividend in the fourth quarter, while it virtually

remains a certainty that it will continue to pay out substantial dividends in the years to come as well

as buy back shares.

The afro mentioned points coupled with the company’s outstanding credit rating and stability, make

Microsoft a great tech name to own from an income perspective.

Growth Factors

Cloud Computing

Satya Nadella has made it his priority to turn Microsoft into a Cloud and enterprise-driven company.

So far his plan has been successful as was reported in the company’s 2016 10K, which showed the

“Intelligent Cloud” segment growing at a stellar pace of 6% y/y, faster than both the computing and

software businesses. Following Amazon’s move to report Cloud computing revenue separately, the e-

commerce giant has become widely regarded as the leader in the Cloud thanks to its AWS division.

Because of this, the company has commanded increasing valuations with a PE of over 180 along with

a soaring share price. Currently, Amazon is seeing a run rate of $10 billion for AWS, which is matched

by Microsoft’s own Azure division. Azure is Microsoft’s main Cloud computing platform, offering

storage, computing, data management and mobility services. If you also included Office 365 sales,

which is now powered by the Cloud, Microsoft moves ahead of Amazon and achieves a $12 billion run

rate. A major catalyst for the stock will be when Satya Nadella elects to report Cloud revenues

separately. Income from the segment is expected to move up an extra 2% in 2017, after coming in

slightly lower in 2016. This is likely to be paired with increasing operating margins. Furthermore, the

company reported that the run rate for Cloud would reach $20 billion by 2020.


Growth of Microsoft Enterprise Ecosystem Microsoft’s long-term goal is to become the leader in the enterprise and Cloud space. As this vision

materializes, we will see the establishment of a Microsoft Enterprise “Ecosystem”, much like Apple’s

current ecosystem of products. The Cloud has made the way for shared documents on Office and easy

storage of files through Microsoft Azure. Devices like the Surface, which have seen consistent growth

quarter after quarter, will become the gold standard for enterprise and business use. The Intelligence

Data Corporation (IDC), a global research firm, published a report in which it discussed how the market

share of major tablet manufacturers would change in the coming years, the results of which are copied

below. As can be seen, the iPad’s market share will shrink significantly while Microsoft will grow

considerably.

The Surface already incorporates many of the features so dear to professionals, including full access

to Windows 10, the ability to edit and create documents on Microsoft Office as well as the power of

a desktop PC. The Windows operating software continues to be widely used throughout the workplace

and the growth of the Surface will only help consolidate this trend. The eventual goal is that Microsoft

will operate an enterprise “ecosystem” like the one Apple currently manages.

Office 365 and the Subscription-Based Revenue Model

Under Satya Nadella, Office adopted a subscription-based revenue model whereby customers pay a

monthly fee to use the suite of products, instead of the old “one -time” purchase. The move has

created monthly recurring income and has made it especially easy to forecast revenue in the future.

This model also results in margin expansion as reliance on third party vendors diminishes. According

to the most recent earnings report, Office commercial revenue grew 59%. Although the number has

predictably decreased y/y, the synergies with LinkedIn should boost growth considerably (more under

“LinkedIn Acquisition”). Both the higher margins and growing and predictable revenue s have

warranted a higher multiple for Microsoft, which is yet to be achieved.


Valuation

Trading Comps

The trading comps model I built above further proves that Microsoft trades at a slight discount to its

peers, which include Oracle Systems (ORCL), Citrix Systems (CTXS) and Alphabet (GOOGL). However,

given the company is in the middle of a transition, it has no direct competitors, which makes using a

comps model less reliable.


Discounted Cash Flow

Based on the Discounted Cash Flow (DCF) using Bloomberg assumptions, MSFT’s intrinsic price based

on the perpetuity growth method lies at $74.22, which signifies upside of 30%. WACC stands at 9.9%

and perpetuity growth at 3.0%.

At the same time, using the same WACC estimate and an exit enterprise value of 12.7x, the EBITDA

Multiple Method yields an intrinsic price of $76.57, indicating upside of 34%.

The DCF further supports the view that MSFT is significantly undervalued.


LinkedIn Acquisition

On June 13 of 2016, Microsoft announced that it would acquire LinkedIn for $196 per share in an all-

cash transaction valued at $26.2 billion. According to the press release, LinkedIn is the world’s largest

and most valuable professional network, which continues to build on its product base by expanding

the services it offers customers. Given this is Microsoft’s largest acquisition to-date (the second being

the purchase of Skype for $8.5 billion in 2011) as well as Satya Nadella’s first big M&A move since

taking the helm as CEO, a lot rides on the future prosperity of the professional social network.

This year, LinkedIn generated $3.72 billion in revenue from its 430 million users, which pales in

comparison to the $27.1 billion gained by Facebook from the 1.6 billion members on the platform.

While Facebook makes $16.9 from each of its members, LinkedIn brings in $8.7 per user. Now,

however, LinkedIn will be able to not only market its product through Microsoft, but it will also benefit

from Nadella’s plan to make LinkedIn and Microsoft the main hubs for sharing business content

amongst professionals.

One of the greatest benefits to Microsoft gained from the acquisition of LinkedIn is the increase in the

total addressable market (TAM). As shown from the diagram below, Microsoft’s TAM will grow by

58%, up $115 billion, to $315 billion. Through their synergies, LinkedIn and Microsoft will benefit from

one another as well as from the ability to sell their products to the other platform’s current user base.

The deal allows Microsoft to roll out Office 365 to LinkedIn’s current network of over 430 million users

by making Office tools the norm for sharing business files.

in the most recent earnings call, Satya Nadella referred to what the company is doing with its various

products like Office and (now) LinkedIn as “being part of one strategy.” In his words, the strategy is

“to connect the world’s professional Cloud and the world’s professional network with [the] pending

LinkedIn deal.”

The near-term goal of such an acquisition is to drive higher adoption of Office 365 and increase

engagement on LinkedIn. Slowly, the hope is that Office 365 will become the norm for Cloud-based

“office” work.


At the same time, another immediate gain to Microsoft is all the valuable data that LinkedIn has

garnered on its users. This data is incredibly valuable, especially when considering how Microsoft can

use it to enhance user experience and further market its products to the right people. Another

opportunity lies in selling data to third party firms. As has been seen from Facebook, which derives

much of its value from the data it collects on users, there are a plethora of opportunities w hen it

comes to generating revenue from information. Based on a lawsuit against Comcast in which the firm

released personal information of more than 75,000 customers – even though those customers had

paid a fee for their information to be kept private – the data of each LinkedIn user could be worth up

to $100, totaling $43 billion for its 430 million members.

In terms of financing for the acquisition, Microsoft issued bonds to raise $19.8 billion, which included

30-year bonds at a yield of 3.7%. Relatively speaking, this rate is incredibly low as Microsoft benefits

from being one of two companies to have a triple A credit rating. If LinkedIn grows net income by 10-

15% over the next three decades, the IRR could hit 16-28% and generate as much as $25 billion in

additional market cap. All this to prove that the LinkedIn acquisition virtually pays for itself, if the right

steps are taken.

Risks

Macro Conditions

Recent economic developments have cast a shadow over equity markets. A stronger dollar, high

valuations for many internet companies accompanied with Brexit, political instability and a slowing

Chinese economy have all led to concerns over the possibility of falling equity prices. As a mega-cap

internet company, Microsoft is vulnerable to both economic turmoil and potentially lower valuations

in the tech sector. That said, unlike many of its peers, like Amazon or Apple, Microsoft derives a

growing amount of its revenue from other businesses and thus does not depend entirely on individual

consumers. Apple, on the other hand, generates much of i ts sales from the iPhone, and is in greater

danger of shrinking consumer demand, especially in the Chinese market. In addition, Amazon, which

is also becoming a major player in the Cloud space, might see its stock price fall mainly because of its

relatively high forward PE of 75 as investors begin to question whether the company can grow

earnings substantially in the future.

Competition Amongst Technology Companies Microsoft has many competitors, that range from large corporations like Amazon and Apple to smaller

startup organizations. Since it operates many different segments, it competes against companies on

different fronts. For example, while Apple remains Microsoft’s biggest rival in the smartphone and

tablet market, Amazon has become a threat in the Cloud space. Although this hasn’t been a problem

in the past, there is always the risk that firms engage in price wars to win over customers, especially

in emerging fields like Cloud computing. This would certainly place downward pressure on operating

margins for all companies involved. It continues to be the CEO’s job to steer clear from such conflicts

and ensure stable growth for the firm.


Conclusion

Microsoft is an incredibly well run business with clear direction. Though its past might not have always

been rosy, plans to shift towards a focus on Cloud computing have started to bear fruits. Both the

revenues and earnings reported for the most recent quarter have reaffirmed Microsoft’s growth

potential and ability to surpass expectations. As it has in the past, the company will continue to

enhance shareholder value through dividends and share buybacks, especially with the expected

increase in free cash flow coming from lower capital expenditures. Through Satya Nadella’s leadership,

Microsoft has made plenty of changes to its core product line and expanded the company’ s scope in

the hopes of connecting all offerings to the Cloud. Taking an enterprise perspective, Microsoft has the

opportunity to become the leader in the enterprise Cloud space as it creates a unique ecosystem

geared towards professionals. As such, products like the Surface tablet, Office 365, Windows 10 and

LinkedIn will all go hand in hand in creating a distinctive experience for the end-user.

Collated Annual Financial Data Since 2008 *Where applicable, numbers in millions. Currency in USD

Income Statement

Income Statement (Annual) 6/30/16 6/30/15 6/30/14 6/30/13 6/30/12 6/30/11 6/30/10 6/30/09 6/30/08

Income (Annual)

Operating Revenue 85320 93580 86833 77849 73723 69943 62484 58437 60420

Excise Taxes

Fees

Revenue 85320 93580 86833 77849 73723 69943 62484 58437 60420

Cost of Goods Sold 32780 33038 27078 20385 17530 15577 12395 12155 11598

Gross Profit 52540 60542 59755 57464 56193 54366 50089 46282 48822

Development Expense

Sales and Marketing Expense 14697 15713 15811 15276 13857 13940 13214 12879 13260

General and Administrative Expense 4563 4611 4677 5013 4569 4222 4063 4030 5127

SG&A Expense 19260 20324 20488 20289 18426 18162 17277 16909 18387

Research Expense

Development Expense

Research and Development Expense 11988 12046 11381 10411 9811 9043 8714 9010 8164

Income Statement Depreciation

Amortization Expense

Amortization of Securities

Rent and Landing Expense


Investment Write Off

Asset Write Down

Special Income and Charges -1110 -10011 -127 0 -6193 0

Provision for Doubtful Accounts

Loss Settl ing Claims

Non Income Taxes

Operating Interest Expense

Operating Interest Income

Net Operating Interest Income

Other Operating Expenses

Total Operating Expenses 32358 42381 31996 30700 34430 27205 25991 25919 26551

Operating Income 20182 18161 27759 26764 21763 27161 24098 20363 22271

Non-Operating Interest Income 903 766 883 677 800 900 843 744 994

Non-Operating Interest Expense 1243 781 597 429 380 295 151 38 106

Net Non-Operating Interest Income Expense -340 -15 286 248 420 605 692 706 888

Non-Operating Income -91 361 -225 40 84 305 223 -1248 655 Other Income and

Expenses -91 361 -225 40 84 305 223 -1248 655

Net Interest Income -340 -15 286 248 420 605 692 706 888

Pre-Tax Income 19751 18507 27820 27052 22267 28071 25013 19821 23814

Provision for Income Taxes 2953 6314 5746 5189 5289 4921 6253 5252 6133 Trust Preferred Security

Payments Income from Continuing

Operations 16798 12193 22074 21863 16978 23150 18760 14569 17681 Income from Discontinued

Operations Extraordinary Items, Income

Statement Income Attributable to

Minority Interest

Accounting Change

Preferred Stock Dividend

Net Income 16798 12193 22074 21863 16978 23150 18760 14569 17681

Normalized Income

17819.4

3679

18550.7

2681

22353.

2972

21830.6

7263

21635.9

5132

22898.4

6817

18592.7

4777

15486.3

1557

17194.6

8712

EBITDA 27616 25245 33629 31236 25614 31132 27837 22421 25976

Reconciled Depreciation 6622 5957 5212 3755 2967 2766 2673 2562 2056

EBIT 20994 19288 28417 27481 22647 28366 25164 19859 23920

Basic EPS (Annual) EPS Basic from Continuing Operations 2.12 1.49 2.66 2.61 2.02 2.73 2.13 1.63 1.9

EPS Basic from Discontinued Operations

EPS Basic from Extraordinaries

EPS Basic from Accounting Change

EPS Basic from Tax Loss Carryforward

EPS Basic from Other Gains / Loss

Normalized Basic EPS 2.24888

8 2.26751

3 2.6936

54 2.60614 2.57478

2 2.70037

3 2.11102

2 1.73255

1 1.84786

5

EPS Basic 2.12 1.49 2.66 2.61 2.02 2.73 2.13 1.63 1.9


Diluted EPS (Annual) EPS Diluted from Continuing Operations 2.1 1.48 2.63 2.58 2 2.69 2.1 1.62 1.87

EPS Diluted from Discontinued Operations

EPS Diluted from Extraordinaries

EPS Diluted from Accounting Change

EPS Diluted from Tax Loss Carryforward

EPS Diluted from Other Gain/Loss

Normalized Diluted EPS 2.22747

2 2.25026 2.6632

54 2.57618

3 2.54760

8 2.66072

8 2.08126

4 1.72196

9 1.81864

7

EPS Diluted 2.1 1.48 2.63 2.58 2 2.69 2.1 1.62 1.87

Shares Data (Annual) Average Basic Shares Outstanding 7925 8177 8299 8375 8396 8490 8813 8945 9328

Average Diluted Shares Outstanding 8013 8254 8399 8470 8506 8593 8927 8996 9470

Dividend Per Share 1.39 1.21 1.07 0.89 0.76 0.61 0.52 0.5 0.43

Balance Sheet

Balance Sheet (Annual) 6/30/16 6/30/15 6/30/14 6/30/13 6/30/12 6/30/11 6/30/10 6/30/09 6/30/08

Assets (Annual)

Cash 3501 3679

Cash and Equivalents 6510 5595 8669 3804 6938 9610 5505 6076 10339

Short Term Investments 106730 90931 77040 73218 56102 43162 31283 25371 13323 Cash and Short Term

Investments 113240 96526 85709 77022 63040 52772 36788 31447 23662

Accounts Receivable 18277 17908 19544 17486 15780 14987 13014 11192 13589

Loans Receivable

Notes Receivable

Other Receivables

Total Receivables 18277 17908 19544 17486 15780 14987 13014 11192 13589

Raw Materials Inventory 612 1100 944 328 210 232 172 170 417

Work in Process Inventory 158 202 266 201 96 56 16 45 31

Finished Goods Inventory 1481 1600 1450 1409 831 1084 552 502 537

Purchased Components Inventory

Other Inventory

Inventories 2251 2902 2660 1938 1137 1372 740 717 985

Prepaid Expenses

Restricted Cash

Current Deferred Tax Assets 1941 1632 2035 2467 2184 2213 2017

Other Current Assets 5892 5461 4392 3388 3092 3320 2950 3711 2989

Total Current Assets 139660 122797 114246 101466 85084 74918 55676 49280 43242


Properties

Land and Improvements 824 769 541 525 528 533 526 526 518

Buildings and Improvements 12393 10800 8867 7326 6768 6521 6087 5886 6030 Machine, Furniture & Equipment 21280 17191 14836 11707 9385 8592 7546 6732 5996

Other Properties

Construction in Progress

Leases 3659 3577 3560 2946 2550 2345 2100 1938

Gross PP&E 38156 32337 27804 22504 19231 17991 16259 15082 12544

Accumulated D&A -19800 -17606 -14793 -12513 -10962 -9829 -8629 -7547 -6302

Net PP&E 18356 14731 13011 9991 8269 8162 7630 7535 6242

Goodwill 17872 16939 20127 14655 13452 12581 12394 12503 12108

Other Intangible Assets 3733 4835 6981 3083 3170 744 1158 1759 1973

Goodwill and Intangibles 21605 21774 27108 17738 16622 13325 13552 14262 14081

Gross Loans

Allow for Loan/Lease Loss

Unearned Income

Net Loan Assets

Long Term Investments 10431 12053 14597 10844 9776 10865 7754 4933

Long Term Notes Receivable

Long Term Receivables

Derivative Instruments

Long Term Deferred Assets 279 949

Long Term Deferred Tax Assets

Long Term Deferred Charges

Pension Asset

Other Long Term Assets 3642 3117 3422 2392 1520 1434 1501 1599 8279

Total Long Term Assets 54034 51675 58138 40965 36187 33786 30437 28608 29551

Total Assets 193694 174472 172384 142431 121271 108704 86113 77888 72793

Liabilities (Annual)

Accounts Payable 6898 6591 7432 4828 4175 4197 4025 3324 4034

Dividends Payable

Current Tax Payable 580 606 782 592 789 580 1074 725

Other Payables 294 92 558 645 814 1208 182 1684

Total Payables 7772 7289 8772 6065 5778 5985 5281 5733 4034

Accrued Expenses 5264 5096 4797 4117 3875 3575 3283 3156 2934 Payables and Accrued

Expenses 13036 12385 13569 10182 9653 9560 8564 8889 6968 Current Provisions - Legal &

Other

Notes Payable

Commercial Paper Liability

Liability on Credit Line

Other Current Borrowings

Current Portion of Long Term Debt 12904 7484 2000 2999 1231 0 1000 2000


Current Capital Lease Obligation

Current Debt & Capital Lease Obligation 12904 7484 2000 2999 1231 0 1000 2000

Current Deferred Revenue 27468 23223 23150 20639 18653 15722 13652 13003 13397

Current Deferred Liabilities 27468 23223 23150 20639 18653 15722 13652 13003 13397

Current Deferred Tax Liability

Other Current Liability 5949 6555 6906 3597 3151 3492 2931 3142 9521

Total Current Liabilities 59357 49647 45625 37417 32688 28774 26147 27034 29886

Long Term Provisions - Legal & Other

Non-Current Portion of Long Term Debt 40783 27808 20645 12601 10713 11921 4939 3746

Long Term Cap Lease Obligation

Non-Current Portion of LTD and Capital Lease Obligation 40783 27808 20645 12601 10713 11921 4939 3746

Long Term Deferred Tax Liabilities 1476 1295 2728 1709 1893 1456 229

Non-Current Deferred Revenue 6441 2095 2008 1760 1406 1398 1178 1281

Non-Current Deferred Liabilities 7917 3390 4736 3469 3299 2854 1407 1281

Non-Current Accrued Expenses

Total Deposits

Security Sold Not Yet Repurchased

Unpaid Loss Reserve Unearned Premium on

Insurance Contract

Pension Liability

Derivative Contract Liabilities

Minority Interest Ownership

Trust Preferred Securities

Preferred Securities out of Shareholders Equity

Restricted Common Stock

Other Long Term Liabilities 13640 13544 11594 10000 8208 8072 7445 6269

Total Long Term Liabilities 62340 44742 36975 26070 22220 22847 13791 11296 6621

Total Liabilities 121697 94389 82600 63487 54908 51621 39938 38330 36507

Shareholder's Equity (Annual)

Total Capital Stock 68178 68465 68366 67306 65797 63415 62856 62382 62849

Retained Earnings 2282 9096 17710 9895 -856 -8195 -17736 -23793 -27703

Additional Paid In Capital

Treasury Stock

Preferred Stock

Unrealized Gain or Loss - Total

Minimum Pension Liabilities

Adjustments for Foreign Currency Translation

Other Equity Adjustments

Accrued Comprehensive Inc 1537 2522 3708 1743 1422 1863 1055 969 1140

Employee Stock Option Plan Debt Guarantee

Shareholders Equity 71997 80083 89784 78944 66363 57083 46175 39558 36286


Cash Flow

Cash Flow Statement (Annual) 6/30/16 6/30/15 6/30/14 6/30/13 6/30/12 6/30/11 6/30/10 6/30/09 6/30/08

Cash Flow - Operations (Annual)

Net Income 16798 12193 22074 21863 16978 23150 18760 14569 17681

Net Income Disc. Operations

Extraordinary Items, Cash Flow

Cumulative Effect of Acct. Change

Gain/Loss on Sale Business

Gain and Loss on Sale of PPE Net Foreign Currency Exchange

Gain/Loss

Gain (Loss) on Investment Securities -223 -443 -109 80 -200 -362 -208 683 -572

Earnings Loss from Eq. Investments

Pension and Employee Expense

Operating Gains Losses -223 -443 -109 80 -200 -362 -208 683 -572

Depreciation Expense

Amortization Expense CF

Total Depreciation and Amortization 6622 5957 5212 3755 2967 2766 2673 2562 2056

Total Depreciation, Amortization, Depletion 6622 5957 5212 3755 2967 2766 2673 2562 2056

Deferred Taxes 332 224 -331 -19 954 2 -220 762 935

Amortization of Securities

Asset Impairment Charge 630 7498 0 0 6193 0

Unrealized Gain (Loss) on Investment Securities

Stock Based Compensation 2668 2574 2446 2406 2244 2166 1891 1708 1479

Excess Tax Benefit from Stock Compensation -209 -93 -17 -45 -52 -120

Other Noncash Items 3298 10072 2446 2197 8344 2149 1846 1656 1359

Change in Receivables -530 1456 -1120 -1807 -1156 -1451 -2238 2215 -1569

Change in Inventories 600 -272 -161 -802 184 -561 -44 255

Change in Prepaid Assets

Change in Payables and Accrued Expense 88 -1054 473 537 -31 58 844 -671

Change in Other Current Assets -1167 62 -29 -129 493 -1259 464 -677 153

Change in Other Current Liabilities -260 -624 1075 146 410 -1146 451 -2700 -748

Change in Other Working Cap -807 1945 386 680 -74 1356 1184 1400 -271

Changes in Working Capital -2076 1513 624 -1375 -174 -3003 661 -178 -2435

Other Cash from Operations

Cash from Operations 33325 29668 32502 28833 31626 26994 24073 19037 21612

Cash Flow - Inv esting (Annual)

Net Change in Capital Expenditures -8343 -5944 -5485 -4257 -2305 -2355 -1977 -3119 -3182

Sale of PPE


Net Change in PP&E -8343 -5944 -5485 -4257 -2305 -2355 -1977 -3119 -3182

Net Change in Intangibles

Net Technology Purchase and Sale

Net Divestitures (Acquisitions) -1393 -3723 -5937 -1584 -

10112 -71 -245 -868 -8053

Total Net Change in Investments -14417 -12868 -7324 -

17802 -

11975 -

13216 -9092 -

11783 6648

Net Other Investing Changes 203 -466 -87 -168 -394 1026

Cash from Investing -23950 -23001 -18833

-

23811

-

24786

-

14616

-

11314

-

15770 -4587

Cash Flow - Financing (Annual)

Net Change in Long Term Debt 11088 9180 6462 3537 0 6146

Net Change in Short Term Debt 7195 4481 500 0 0 -186 190 5746 0

Net Debt Issuance 18283 13661 6962 3537 0 5960 190 5746 0

Common Stock Issuance 668 634 607 931 1913 2422 2311 579 3494

Common Stock Payments -15969 -14443 -7316 -5360 -5029

-

11555

-

11269 -9353

-

12533 Net Common Equity Issued

(Purchased) -15301 -13809 -6709 -4429 -3116 -9133 -8958 -8774 -9039

Preferred Stock Issuance

Preferred Stock Payments

Net Preferred Equity Issued (Purchased)

Total Common Dividends Paid -11006 -9882 -8879 -7455 -6385 -5180 -4578 -4468 -4015

Total Preferred Dividends Paid

Total Dividends Paid -11006 -9882 -8879 -7455 -6385 -5180 -4578 -4468 -4015

Proceeds from Stock Option Exercised

Proceeds from Issued Warrants

Cash from Other Financing Activities -369 362 -39 199 93 -23 55 33 120

Cash from Financing -8393 -9668 -8665 -8148 -9408 -8376 -

13291 -7463 -

12934

Ending Cash (Annual)

Beginning Cash 5595 8669 3804 6938 9610 5505 6076 10339 6111

Change in Cash 915 -3074 4865 -3134 -2672 4105 -571 -4263 4228

Cash Foreign Exchange Adjustment -67 -73 -139 -8 -104 103 -39 -67 137

Ending Cash 6510 5595 8669 3804 6938 9610 5505 6076 10339

Additional Items (Annual)

Cash from Discontinued Operations Adjustment

Issuance of Capital Stock 668 634 607 931 1913 2422 2311 579 3494

Issuance of Debt 13884 10680 10350 4883 0 6960 3176 5974 0

Debt Repayment -2796 -1500 -3888 -1346 0 -1000 -2986 -228 0

Repurchase of Capital Stock -15969 -14443 -7316 -5360 -5029 -

11555 -

11269 -9353 -

12533

Income Tax Paid Supplemental Data

Interest Paid Supplemental Data

Domestic Sales 40578

Foreign Sales 44742


Disclaimer John Ducas (“The Author”) is not a registered investment adviser does not purport to tell or suggest which securities you should buy or sell for yourself. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The author assumes no responsibility or liability for your trading and investment results. It should not be assumed that the methods, techniques, or indicators presented in this article will be profitable or that they will not result in losses. This article is provided for informational and educational purposes only and should not be construed as investment advice. The article is not a solicitation of any order to buy or sell. You should always check with your licensed financial adviser and tax adviser to determine the suitability of any investment.

References https://www.microsoft.com/en-us/Investor/segment-information.aspx https://www.microsoft.com/en-us/Investor/sec-filings.aspx https://ycharts.com/companies/MSFT https://enterprise.microsoft.com/en-us/industries/discrete-manufacturing/an-expanding-ecosystem/ http://www.pcmag.com/news/343103/9-7-inch-ipad-pro-vs-surface-pro-4-whats-best-for-busines http://www.cultofmac.com/315399/tablet-market-growth-is-shrinking-and-ipad-is-the-weakest-link/

https://www.microsoft.com/en-us/Investor/segment-information.aspx

https://www.microsoft.com/en-us/Investor/sec-filings.aspx

https://ycharts.com/companies/MSFT

https://enterprise.microsoft.com/en-us/industries/discrete-manufacturing/an-expanding-ecosystem/

http://www.pcmag.com/news/343103/9-7-inch-ipad-pro-vs-surface-pro-4-whats-best-for-busines

http://www.cultofmac.com/315399/tablet-market-growth-is-shrinking-and-ipad-is-the-weakest-link/

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