Financial Analysis

Financial Analysis

Company History and Overview

Microsoft was founded when Bill Gates and Paul Allen developed an interpreter for Basic programming language at Micro Instrumentation and Telemetry Systems in 1975. The company started its first international office in Japan as ASCII Microsoft in 1978. Microsoft moved from Albuquerque to Bellevue, Washington in 1979.The company acquired a variant of Unix from AT&T and launched it as Xenix, the company's first operating system in 1980. Microsoft was incorporated in 1981. In the same year, the company launched MS-DOS (Disk Operating System) and entered into a contract with IBM to provide an operating system for IBM's personal computer named PC-DOS.The company started its first international production facility in the Republic of Ireland in 1985. In the same year, the company launched Microsoft Windows, a graphical extension of its MS-DOS operating system. Microsoft also partnered with IBM to provide OS/2 operating system. The company was relocated to Redmond, Washington in the following year. In November 2011, Microsoft retailed its Windows phones. In the same month the company entered into an agreement with Yahoo!, where in Yahoo!, Microsoft and AOL can offer each other's premium non-reserved online display inventory to their respective advertising customers. Furthermore, in November 2011, Microsoft acquired a California-based video discovery technology company Video Surf. Video Surf's content analytics technology is expected to enhance the search and discovery of entertainment content across the company's platform.

Market Analysis

This section is dived into two parts which primarily includes the advantages and disadvantages of the market trends and patterns for Microsoft corporation

Advantages

Broad portfolio of integrated offerings

Microsoft's broad portfolio of offerings is effectively integrated. The company develops and offers services, software and hardware and therefore is equipped with vertically integrated offerings. In the Microsoft business division, the company derives revenues from Microsoft office products along with SharePoint, Exchange, Dynamics and Lync. All these products are core to several enterprise workflows and can be integrated. The company also offers Windows operating system as well as Windows servers. All the three divisions offer products and services that are complementary in nature and drive significant cross selling opportunities

High operating margins and cash position

Microsoft enjoys strong margins and cash flow conversion rates. The company's operating margins in FY2011 were 38.8% while its net margin was 33.1%. Microsoft converted 116% of its net profits into free cash flow. Comparatively, IBM's operating margin was 18.8% and net margin was 14.8% in FY2011. IBM converted 104.7% of its net income into free cash flow. Oracle's operating profit was 33.8% and net profit was 24% in FY2011.

Disadvantages

Weak product line in mobile market

Microsoft, owing to late entry into the mobile market, faces competition from entrenched and strong players like Apple and Google. The Windows phone was launched in 2011 in partnership with Nokia. This market was already dominated by Apple and Samsung (uses Android) which holds about 55% of the market share. Similarly, the company is yet to make an entry into the tablet market with the launch of Windows 8 in ...