Microsoft (MSFT) Stock Price Drivers

Stock Price Drivers Due to the company's heavy reliance on sales of Windows OS and Microsoft Office for growth, Microsoft's stock price has traditionally reflected the demand from the PC market. As the industry shifts away from the usage of PCs, Microsoft's stock price will become increasingly dependent on smartphone and tablet sales. Windows Division 35% of the segment's revenues are generated from commercial and retail sales. 65% of the segment's revenues are generated from Original Equipment Manufacturers (OEMS). Worldwide PC Revenues vs. Windows Division Revenues $250,000 $20,000 $234,643 $17,865 $220,000 $18,000 $16,865 $190,000 $16,000 $179,684 $160,000 $14,000 $130,000 $12,000 $100,000 $10,000 2008 2009 2010 2011 2012 2013 2014E -Worldwide PC Revenues Windows Division Revenues The Average Selling Price (ASP) of Windows S for OEMS has been falling since 2010, with the pace expected to accelerate in 2013 and 2014. Pricing pressures and weakening demand are the major factors behind falling revenues from this segment. However, Microsoft's recent restructuring and acquisition of Nokia may reverse trends in the future. Annual Change in Windows ASP for OEM 4% 2% 0% -2% -4% -6% -8% 2009 2010 2011 2012 2013E 2014E Revenues from the Windows division are almost 90% dependent on the Windows OS, and the demand for Windows OS is related to the demand for devices that use the software. Recently, shipments of smartphones and tablets that use Windows OS have become an important indicator for demand. Microsoft does not yet have a strong footing in the market for smartphones and tablets, but its market share of smartphone is expected to rise to 10.2%* by 2017 compared to current 3.6% with its purchase of Nokia's devices and services unit. *Source: IDC Windows OS Smartphone Shipmets Global Revenues: PCs vs. Tablets (units in millions) (in billions) -Worldwide Tablet Revenues Worldwid PCs Revenues 10 8.64 $260 7.04 6.03 $210 4.87 $160 3.75 4 3.26 $110 3 $60 $10 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 2010 2011 2012 2013 2014 Servers and Tools: 67% 80% 80% of the segment's revenues are generated from product sales, and the remaining from enterprise services. of revenue stream is recurring. The Server & Tools division's historic five-year CAGR of 9% is the highest among Microsoft's business divisions. The segment's growth can be pinned to its successes in generating higher multi- year licensing fees from sales of server software. On the other hand, transactional revenues are generated from sales of server hardware, and have recorded a declining trend due to weakening demand. Annuities Revenue vs. Transactional Revenue Annuities Transactional (in millions) $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 2008 2009 2010 2011 2012 2013 The Servers and Tools division has recently started providing Hyper-V, a software used in the virtualization process. As shipments of virtual machine increase side-by-side, Hyper-V is expected to become an important future driver for the segment. Meanwhile, Windows Azure - Microsoft's latest offering in the cloud computing industry - is also gaining traction. Microsoft does not provide specific data on its cloud offerings, but Chris Suh, the general manager of Microsoft's Investor Relations department, recently claimed that "50% of the Fortune 500 companies are using Windows Azure." Business Division 66% of the revenue from Annuities Deferred revenues from Microsoft's Business division have continued to strengthen in FY13, with the segment recording 11% growth in revenues from subscriptions and licensing. Deferred Revenue (in millions) $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Office 365 is projected to contribute $1.5 billion in revenues for the full fiscal year, and will be a major growth driver for the Business division. Office 365 is the cloud version of Microsoft Office, and is available on a subscription basis. Entertainment and Devices The Entertainment and Devices segment has grown primarily due to an increase in shipments of smartphones using the Windows Phone OS. Shipments of smartphones using Windows OS posted 78% year-over-year (YoY) growth in 20FY13, and their total market share is now at 3.7%. Nokia-manufactured devices accounted for 81% of the total shipments of Windows OS phones. Following Microsoft's acquisition of Nokia's devices and services unit, Windows phones, along with Skype and Xbox One, are expected to become important future drivers for the segment. Windows Smartphone Shipmets (units in millions) 10 8.64 7.04 6.03 4.87 3.75 3.26 3 10FY12 2QFY12 3QFY12 4QFY12 10FY13 20FY13 BIDNESS SOURCES: Company Data, SEC filings, Bloomberg Professional Services Etc. DISCLAIMER: Bidness Etc(TM) and related marks are owned by Bidness Etc. Any other trademarks appearing on this website are the property of their respective owners, and are not used to indicate the origin of goods or services offered or provided by Bidness Etc herein or to suggest approval for or affiliation with Bidness Etc. FOODDFOODDE EDNNDENDDUE