Financial Analysis: Microsoft.
1. Revenue goes up, why?
Revenue increases are explained in Microsoft financial statements for FY 2014 and 2015. Revenue growth of 12% or $9 Billion in 2014 compared to 2013 was due to “higher revenue from server products, Xbox Platform, Commercial Cloud, and Surface. Revenue also increased due to the acquisition of NDS. Commercial Cloud revenue doubled, reflecting continued subscriber growth from our cloud-based offerings” (Microsoft, 2014). Revenue growth of 8% or $6.7 Billion in 2015 compared to 2013 was mainly due to “a full year of Phone Hardware sales and growth in revenue from our Commercial Cloud, Surface, server products, search advertising, and Xbox Live transactions. These increases were offset in part by a decline in revenue from Office Commercial, Windows OEM, licensing of Windows Phone operating system, and Office Consumer” (Microsoft, 2015).
2. Why margin decrease? Check competitor.
In 2014 Gross Margin decreased compared to 2013 due to higher cost of sales of X-Boxes and other devices and increased costs of datacenter. In 2015 the gross margin dropped compared to previous years due to increased costs of Commercial Cloud and Phones hardware. Industry average gross margin is 0,59, which is still lower than the worst Microsoft result of 2015 (0,65) (Yahoo, 2016).
3. Restructuring and asset impairment charges, why? (Check finical statement). Phone hardware goodwill impairment accounts for $7.5 Billion out of $10 Billion impairment and restructuring expense. The remaining balance is a writ-down of the Phone hardware intangible assets related to the same Phone hardware impairment test.
4. EBITDA, EBIT is low and back one time $10,011 cost restructuring. Why? The same reasons as question 3 above. A 2015 impairment test indicated that Phone hardware goodwill exceeds its fair value. Hence, write-down expenses and lower EBITDA and EBIT.
5. No new and hot product, just generating cash. → Operating performance from income statement. Research and development of new products expenses increased by $970 Million in 2015. Obviously, the company is aware of the fact that it had not introduced any hit products recently.
6. Goodwill drop → may purchase new company, but nothing! Why?
Goodwill decrease is explained in questions 3 and 4.
7. Long-term debt double check debt due date, no debt coming due like 2019.
Long-term debt is described in detail in Note 12 to 2015 financial statements. There are portions of long-term debt coming due every year. Please see the table below:
The components of our long-term debt, including the current portion, and the associated interest rates were as follows as of June 30, 2015 and 2014:
8. Making money, current asset health, debt is not normal current liabilities goes up. Why? Microsoft has issued $3 Billion additional commercial papers compared to 2014. The other growth in AP is normal taking into account sales growth.
9. Ratios are health, no issue about solvency-leverage ratio, debt/equity ratio?
Ratios are showing no indication of any problems. The company is the leader of its industry.
10. Check cash flow statement dividend/common stock repurchase is not good. Why? Stock repurchase does not indicate problems. Companies repurchase stock on a regular basis for various reasons. Such reasons may include stock price decreases, protection from unfriendly stock purchases, etc.
11. Max shareholders value take long-term debt which is cheap cost. By financing growth and new product development the company is maximizing shareholders value. The future revenues will go up, while the amount invested by shareholders remains the same, increasing the earnings per share indicator.
12. Revenue goes up, but margin goes down → cost more and more to generate revenue. In order to understand this trend, the composition of sales has to analyzed. Microsoft commented that sales increases in the past two years (2014 and 2015) were due to the growth in sales of more cost-intensive products, like phone hardware and x-boxes. These products are more cost-intensive than software.
13. Compare with their competitor. P/E ratio → check NASDQ is high stock price expensive, Why? Microsoft’s P/E ratio is 33% higher than the industry average (Yahoo! Finance, 2016). Their competitors are nowhere close to the numbers Microsoft achieved in this indicator.
References.
Microsoft, (2014). Microsoft 2014 Annual Report. Retrieved on June 3, 2016 from: https://www.microsoft.com/investor/reports/ar14/index.html
Microsoft, (2015). Microsoft 2015 Annual Report. Retrieved on June 3, 2016 from: https://www.microsoft.com/investor/reports/ar15/index.html
Yahoo! Finance, (2016). Microsoft Corporation (MSFT). Competitors. Retrieved June 3, 2016 from: http://finance.yahoo.com/q/co?s=MSFT+Competitors
