Company Profile - Microsoft Corporation - Q3 2015

07 Jul 2015 Glo bal IT/Co mpute rs Micro so ft

S WO T ANAL Y S IS

Strengths Leading global vendor in operating s ys tem, produc tivity s oftware and s erver markets .
Launc h of Windows 8 has widened Mic ros oft's pres enc e into new devic e c ategories .
Strong grip on the des ktop applic ation market, with Mic ros oft Offic e holding more than 90% of the offic e s oftware market.

Weaknesses Mic ros oft has rec eived c ritic is m in the pas t for problems with antic ompetitive prac tic es , s tability, s ec urity and c ompatibility.
Late entrant to the s martphone OS market s ees it lag behind rivals Apple and Google.

Opportunities Launc h of Windows 8 and Windows Phone 8 pos itions Mic ros oft to benefit from popularity of touc hs c reen devic es inc luding
s martphones , tablets and hybrid c omputers .
Skype integration with enterpris e and c ons umer produc ts and s ervic es offers growth potential.
Launc h of Xbox One in Q413 will inc reas e pres enc e in c ons umer's front-rooms , a new battleground for c ons umer elec tronic s
c ompanies .
Cloud s ervic es s eeing s trong growth in the bus ines s market and uptake of c ons umer c loud s ervic es als o inc reas ing.
Interc onnec tivity between Mic ros oft's many different produc ts and s ervic es will allow the c ompany to c apitalis e s trongly on its
s ubs tantial inves tment in c loud c omputing..

Threats A weaker ec onomic environment will res ult in the delay of purc has es and upgrades to Windows and Offic e applic ations .
Ris ing popularity of tablets and s martphones running Apple's iOS and Google's Android as alternatives to notebooks will s queeze
Windows devic e s ales .
Multiple rivals in the c loud market, both in public c loud provis ion and SaaS, whic h c ould limit growth and s queeze bus ines s s oftware
s ales .
Pirac y c ontinues to be a drag on revenue from s oftware s ales inc luding Windows and the Offic e s uite.

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 Company Mic ros oft Corporation develops , manufac tures , lic enc es and s upports a wide range of c omputing s ervic es . Founded in 1975, it bec ame
Overview the dominant player in the home c omputer market in the 1980s through its MS-DOS operating s ys tem. This was s uc c eeded by Mic ros oft
Windows . It als o c reated Mic ros oft Offic e, the dominant player in the Offic e s oftware s uite.

Mic ros oft is divided into five produc t divis ions : Windows & Windows Live Divis ion; Server and Tools ; Online Servic es Divis ion; Mic ros oft
Bus ines s Divis ion; and Entertainment and Devic es Divis ion.

Windows and Windows Live Division: Windows and Windows Live Divis ion develops and markets PC operating s ys tems , related s oftware
and online s ervic es , and PC hardware produc ts . This divis ion foc us es on s oftware, hardware and s ervic es des igned to improve effic ienc y
through extended brows ing c apabilities and operations ac ros s the us er's hardware and s oftware. The Windows Divis ion c ons is ts of
multiple editions of the Windows operating s ys tem, s oftware and s ervic es through Windows Live and Mic ros oft PC hardware produc ts .

Server And Tools: This area develops and markets tec hnology and related s ervic es , with the aim to improve produc tivity and
effic ienc y. Produc ts and s ervic es under this divis ion inc lude Windows Server, Mic ros oft SQL Server, Windows Azure, Vis ual Studio, Sys tem
Centre produc ts , Windows Embedded devic e platforms and Enterpris e Servic es . Enterpris e Servic es c ompris e Premier produc t s upport
s ervic es and Mic ros oft Cons ulting Servic es . It als o c overs developer tools , training and c ertific ation.

Around 50% of this s egment's revenue c omes from multi-year volume lic ens ing agreements , 30% is purc has ed through trans ac tional
volume lic ens ing programmes , retail pac kaged produc t and lic enc es s old to original equipment manufac turers (OEMs ), and the remainder
c omes from Enterpris e Servic es .

Online Services Division (OSD): The OSD develops and markets information and c ontent des igned to help s implify tas ks and improve
utility of online s ervic es . It als o helps advertis ers c onnec t with their target audienc es . OSD produc ts inc lude Bing, MSN, adCenter and
advertis er tools . Bing and MSN generate revenue through the s ale of s earc h and dis play advertis ing, whic h ac c ounts for nearly 100% of
OSD's annual revenue. In February 2013 Mic ros oft c los ed its hotmail s ervic e, moving ac c ounts over to Outlook email s ervic e. The Outlook
s ervic e is powered by the SkyDrive c loud s ervic e and Mic ros oft c laims it to be the fas tes t growing email s ervic e in the world by us ers .

Microsoft Business Division (MBD): This divis ion is the development and marketing arm for s oftware and online s ervic es des igned to
inc reas e produc tivity in teams , organis ations and on a pers onal level. MBD offerings inc lude Mic ros oft Offic e (c ompris ing mainly
SharePoint, Exc hange, Lync and Offic e 365), whic h generates more than 90% of MBD revenue. The other 10% c ompris es Mic ros oft
Dynamic s bus ines s s olutions . Revenues are divided into bus ines s revenue, whic h inc ludes Mic ros oft Offic e s ys tem revenue, generated
through volume lic ens ing agreements and Mic ros oft Dynamic s revenue, and c ons umer revenue, whic h inc ludes revenue from retail
pac kaged produc t s ales and OEM revenue.

In February 2013 Mic ros oft announc ed the worldwide availability of Mic ros oft Offic e 365 s ervic es for bus ines s (launc hed in mid-2011). The
365 s uite inc ludes and updated Mic ros oft Lync Online, Mic ros oft Exc hange Online and Mic ros oft SharePoint Online, as well as providing
us ers ac c es s to Offic e applic ations on up to five devic es . Offic e 365 will be available in 89 markets and 33 languages by mid-2013.
Mic ros oft reported that SME s ubs c riptions to Offic e 365 inc reas ed 150% in 2012.

Entertainment And Devices Division (EDD): This area foc us es on the development and marketing of entertainment and c onnec tivity
s ervic es . EDD produc ts inc lude the Xbox 360 (whic h inc ludes gaming and entertainment c ons oles , Kinec t, Xbox 360 video games , Xbox
LIVE, and ac c es s ories ). It als o inc ludes Mediaroom IPTV s oftware, Skype and Windows Phone. Mic ros oft ac quired Skype on Oc tober 13
2011.

In Q2 FY2013, the EDD rec orded 5.9mn c ons oles s old as Xbox 360 c ontinued to be top s elling games c ons ole in the US. Xbox live
s ubs c ribers c ame to over 40mn and the Kinec t reac hed an ins talled bas e of 18mn units . Skype regis tered 200mn us ers . In Q2 FY13,
Windows Phone 8 was launc hed with a broad range of c arriers and devic es inc luding thos e from Nokia, Sams ung and HTC.

Mic ros oft has als o launc hed its own tablet hardware, the Surfac e, whic h is available either as an RT or Pro vers ion. The Pro was only
launc hed in February 2013 and runs Windows 8 Pro and is able to run all Windows 8 applic ations .

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 Strategy The announc ement that Mic ros oft CEO, Steve Ballmer, was s tepping down within the a year was greeted pos itively by inves tors , with the
s hare pric e jumping 7%, as they hoped new leaders hip would be more likely to guide Mic ros oft to its 'pos t-PC' future. Sentiment had
bec ome more bearis h as Mic ros oft fac es a s erious c hallenge from dec lining des ktop and notebook s ales , while it lac ks expos ure to the
fas t growing tablet and s martphone markets , widely c ons idered a failure under Ballmer's s tewards hip. The outlook for the Windows
divis ion, onc e a c as h c ow, is now highly unc ertain, and Mic ros oft will have to adapt its s trategy, but BMI believes there are s everal reas ons
for optimis m about Mic ros oft's future.

On September 3, Mic ros oft announc ed its ac quis ition of Nokia's hands ets divis ion.

Cloud Computing And Interconnectivity: In April 2011, Mic ros oft announc ed it was to s pend 90%, or USD8.64bn, of its res earc h and
development (R&D) budget on developing c loud c omputing s ervic es . Mic ros oft's s hift towards s oftware-as -a-s ervic e (SaaS) is enabling
applic ations and s ervic es that his toric ally have been s eparate to bec ome more integrated, working to c onnec t PCs , phones , c ameras ,
game c ons oles and video and mus ic players through c lient s oftware and high-s peed internet s ervic es us ing a c ombination of Windows ,
Windows Live and Windows Phone OS.

Windows Phone: The Windows Phone was releas ed in Europe, Singapore, Aus tralia, New Zealand, the US, Canada and Mexic o in H210 and
in As ia in H111. Mic ros oft and Nokia formed a s trategic partners hip in February 2011 to build a global mobile ec os ys tem bas ed on
c omplementary as s ets . Mic ros oft would provide developer tools , making it eas ier for applic ation developers to leverage Nokia's global
s c ale while Nokia's applic ation and c ontent s tore would be integrated into Mic ros oft Marketplac e.

Windows Phone 8 was launc hed in Q2 FY13, with flags hip devic es from Nokia's Lumia range. As well as targeting devic es at the developed
s martphone markets Mic ros oft announc ed the 4Afrika initiative in February 2013 as part of a pus h into emerging markets . The initiative
inc ludes the c reation partners hips to promote loc ally s pec ific c ontent as well as hands ets that are tailored for Afric an markets inc luding
Huawei's W1, whic h boas ts long battery life and will be preloaded with loc al c ontent. The devic e initially launc hed in Angola, Egypt, Ivory
Coas t, Kenya, Moroc c o, Nigeria and South Afric a in Marc h 2013. Mic ros oft is looking to c apitalis e on Windows Phone 8's s trength in
performing on mid-s pec devic es .

Windows 8: Windows 8 was launc hed in Oc tober 2012, introduc ing a new us er interfac e inc luding 'live tiles ', as well as touc h func tionality.
Early reports s ugges t uptake of the new OS has been s lower than with previous launc hes of Windows 8, but with s upport for XP withdrawn
from 2014 and an inc reas ing range of touc h devic es available uptake is expec ted to ac c elerate through 2013 and 2014. The new OS has
als o s purred devic e innovation, with a range of vendors experimenting with hybrid form fac tors that bring together the popular mobility of
tablets with the broader func tionality notebooks . Over the medium term there is potential for thes e hybrids to impac t tablet and
notebooks s ales by offering the Offic e produc tivity s oftware alongs ide the media c ons umption s trength of tablets .

Company Mic ros oft was offic ially es tablis hed on April 4 1975 by Paul Allen and Bill Gates , but entered the operating s ys tem bus ines s in 1980 with a
History vers ion of Unix, c alled Xenix. They lic ens ed this to hardware manufac turers s uc h as Intel, Tandy and Altos . However, it was the DOS s ys tem
that proved the key to Mic ros oft's s uc c es s . In November 1980, IBM awarded a c ontrac t to Mic ros oft to provide a vers ion of the s ys tem to
be us ed in the upc oming IBM Pers onal Computer. While IBM rebranded the s ys tem PC-DOS, Mic ros oft retained owners hip of the MS-DOS
s ys tem, and it s oon bec ame the leading PC OS vendor.

In 1984, the c ompany releas ed Mic ros oft Windows , a graphic al extens ion for MS-DOS. In 1986, the c ompany launc hed an IPO, whic h made
12,000 Mic ros oft employees ins tant millionaires . In 1990, the c ompany launc hed the Mic ros oft Offic e s uite, whic h joined Windows as
being a dominant player in its field. However, this led to numerous legal wrangles , as Mic ros oft was ac c us ed of antic ompetitive prac tic es .

As the internet began to gain popularity in 1995, the c ompany expanded into c omputer networking and online s ervic es . This year s aw the
releas e of Windows 95, online s ervic e MSN and the web brows er Internet Explorer, whic h s et Mic ros oft as a pioneer in the internet era.

The c ompany moved into the video games market in 2001 with the releas e of the Xbox, providing a c hallenger to Sony and Nintendo in that
market. In Marc h 2004, the c ompany was involved in an antitrus t c as e agains t the EU whic h res ulted in Mic ros oft paying EUR497mn for
abus e of market dominanc e. The c ompany was forc ed to produc e new vers ions of Windows XP without Windows Media Player, Windows
XP Home Edition N and Windows XP Profes s ional N.

Windows Vis ta and Mic ros oft 2007 were releas ed in January 2007, whic h led to a rec ord profit for Mic ros oft in that year. However, the
legal wrangles c ontinued and the c ompany was fined an additional EUR899mn for lac k of c omplianc e with the 2004 ruling. Bill Gates
s tepped down as c hief s oftware arc hitec t in 2008, although c ontinues to hold pos itions within the c ompany until today.

In 2008, the c ompany launc hed its Azure Servic es Platform, its firs t foray into the c loud c omputing market. In 2010, it foc us ed on reforming
its operating s ys tem for mobile telephony, named Windows Phone OS, and refined its s trategy for entering the s martphone indus try.

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 Recent The dec line in des ktop and notebook s hipments has hit Mic ros oft's s ales of its Windows operating s ys tem. Its mos t rec ent financ ial
Financial res ults s how revenue for the Windows Divis ion was up 6.2% y-o-y in Q413. However, this inc ludes the launc h of Windows 8 in Oc tober
Performance 2012. The s ales boos t from the new OS was s ignific antly les s than for Windows 7, reflec ting the dec lining s ales of des ktops and
notebooks .

Further, operating profit for the Windows Divis ion was down 54.7% y-o-y to Q4, and down 17.8% for FY2013 as a whole. This is a c onc ern
for Mic ros oft bec aus e Windows has been the s ec ond larges t c ontributor to group operating profit in rec ent years , and margins had
remained relatively s table 2009 to 2012 between 66.9% and 62.9%. By end-2013 this figure has fallen to 49.4% as the weight of s ales and
marketing expens es dragged down profitability due to only modes t revenue growth. This is in c ontras t to the launc h of Windows 7 that
res ulted in a muc h larger s pike in revenue.

Mic ros oft rec ently reported operating res ults for Q4 FY13, whic h s howed a y-o-y revenue inc reas e of 10.2% to USD19.896bn in the three
months to the end of June, with revenue inc reas ing in all five divis ions . The Bus ines s Divis ion grew the fas tes t, with revenue up 14.1%,
deepening its s tatus as Mic ros oft's larges t revenue generator. The Server and Tools als o outpac ed growth in the Windows divis ion,
c ementing its pos ition as the s ec ond larges t revenue generating divis ion. Taken together Bus ines s and Server and Tools ac c ounted for
63.9% of group revenue in Q4 FY13, and with both divis ions growing fas t there is reas on for optimis m about s hort- to medium-term
financ ial performanc e. Furthermore, Server and Tools operating profit inc reas ed 14.1% y-o-y to Q4, while bus ines s operating profit jumped
18.1% over the s ame period as the operating margin in Mic ros oft's two larges t divis ions inc reas ed.

Financial Data Revenue (FY11): USD69.943bn

Revenue (FY12): USD73.723bn

Revenue (FY13): USD77.849bn

Revenue (FY14): USD86.833bn

Revenue (H1 FY15): USD49.671

Operating Profit (FY11): USD27.161bn

Operating Profit (FY12): USD21.763bn

Operating Profit (FY13): USD26.764bn

Operating Profit (FY14): USD27.759bn

Operating Profit (H1 FY15): USD13.62bn

Net Inc ome (FY11): USD23.15bn

Net Inc ome (FY12): USD16.978bn

Net Inc ome (FY13): USD21.863bn

Net Inc ome (FY14): USD22.074bn

Net Inc ome (H1 FY15): USD10.403bn

Employees (2011): 90,000

Operational Xbox 360 Cons oles Sold (FY11): 13.5mn

Data
Xbox 360 Cons oles Sold (FY12): 13.0mn

Xbox 360 Cons oles Sold (FY13): 9.9mn

Xbox 360 Cons oles Sold (H1 FY15): 6.6mn

Skype Monthly Connec ted Us ers (FY12): more than 250mn

Skype Monthly Connec ted Us ers (Q1 FY13): more than 280mn

Skype Monthly Connec ted Us ers (Q2 FY13): more than 300mn

Skype Minutes of Calls (FY12): 377bn

Skype Minutes of Calls (Q1 FY13): 120bn

Skype Minutes of Calls (Q2 FY13): 138bn

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 Company Mic ros oft Corporation
Details
One Mic ros oft Way
Redmond
Was hington
United States
WA 98052

Tel: 4858828080

www.mic ros oft.c om

This mate rial is pro te cte d by inte rnatio nal co pyright laws, and use o f this is subje ct to o ur Te rms & Co nditio ns.
2015 Busine ss Mo nito r Inte rnatio nal Ltd