Fitch Affirms Microsoft at 'AA+'; Outlook Stable
NEW YORK -- December 19, 2012
Fitch Ratings has affirmed Microsoft Corp.'s (Microsoft) ratings as follows:
--Long-Term Issuer Default Rating (IDR) at 'AA+';
--Senior unsecured debt at 'AA+';
--Short-Term IDR at 'F1+';
--Commercial paper (CP) program at 'F1+'.
The Rating Outlook is Stable. Approximately $14 billion of debt is affected by
Fitch's action, including Microsoft's issuance of $2.25 billion of senior
notes on Nov. 7, 2012.
Microsoft's ratings and Outlook reflect the following:
--Fitch anticipates mid-single-digit revenue growth in fiscal year 2013 ending
June 30, primarily supported by several new major software product
introductions, including Windows 8, Windows Server 2012 and Office 2013, which
is expected to be released near the end of calendar year 2012.
Consumer demand for Windows 8 will also be facilitated by the greater
availability and broader selection of touch-enabled PCs in a variety of form
factors from original equipment manufacturers. Continued macroeconomic
challenges led by Europe and enterprise delays in adopting new PC operating
systems will temper near-term growth of Windows 8.
--Surface will contribute minimally to free cash flow (FCF) in 2013, given the
initial lack of scale and highly competitive landscape for tablets.
Microsoft's Surface Pro tablet, expected in early calendar 2013, is likely to
be a commercial success given its compatibility with Microsoft Office
applications, enhanced security and easier manageability. Critical success
factors for Surface Pro will be battery life, cost and availability of key
--Fitch believes Microsoft has strengthened its position in the mobile phone
market in the past year as a result of licensing agreements with the vast
majority of Android device manufacturers and the launch of Windows phone 8 in
late October 2012.
--The company's Online and Entertainment & Devices segments (Bing, Xbox,
Skype, Windows Phone, etc.) will continue to be a drag on profitability over
the intermediate term. These segments remain a critical component of
Microsoft's longer-term strategy in the consumer market; however, competition
remains fierce and Fitch does not expect these segments to contribute
materially to FCF for the foreseeable future.
--Fitch expects Microsoft to continue to produce strong FCF, in excess of $15
billion per year, which the company uses to fund its share repurchase and
dividend programs. Fitch expects cash generation from operations to be strong
enough to pay for modest annual increases in both dividends and share
repurchases over the next several years excluding potential for meaningful
acquisitions. Fitch expects all repurchases will be done within the context of
--The company's sizable liquidity and superior credit profile provide a
significant degree of financial flexibility within the current ratings. Going
forward, Fitch believes Microsoft will become more active with acquisitions
and share buybacks over time but continue to maintain a significant net cash
--Absent broader corporate tax reform, Fitch does not expect any negative
outcome from Microsoft's recent tax hearings with the Senate Permanent
Subcommittee on Investigations.
--Leading market positioning in its core software businesses, including over
90% in PC operating systems (OS) and 75% in servers.
--Very strong balance sheet with $66 billion in cash and short-term
investments. Microsoft generates nearly $1 billion in pretax income from
interest and dividends alone.
--Diversification of end market with consumers and enterprise demand as well
as strong geographic diversification. No customer is larger than 10% of
--Reliance on Windows and Office for the vast majority of FCF. In aggregate,
these products accounted for nearly 80% of total operating income, excluding
unallocated corporate level expenses. However, strong growth and margin
expansion in the Server and Tools business has reduced the contribution of
Windows and Office from a four-year high of nearly 89%.
--Growing popularity of other operating systems outside of the core PC space,
principally Apple's iOS as well as Google's Android and Chrome platforms.
Fitch believes both platforms will continue to grow as competitive threats to
--Extension of PC replacement cycle due to the popularity of tablets and
--Minimal historical success in developing profitable consumer businesses
outside of Microsoft's core Windows and Office ecosystem despite significant
investment over a decade-plus in other consumer markets. Fitch believes this
is indicative of the challenging competitive environment.
--Significant dividend and share repurchase programs, though funded entirely
today by FCF, could pressure the company to issue increasing amounts of debt
to avoid repatriation of foreign earnings, which represent the majority of
total annual FCF.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Penetration of alternative operating system's such as Chrome OS in the PC
market and/or greater market share gains by Apple;
--Greater than expected extensions of PC replacement cycles because of
tablets, without a commensurate gain from Microsoft Surface. Fitch currently
expects PC replacement cycles to extend on average up to 12 months.
--Greater acceptance of cheaper software applications that compete with
Microsoft Office such as Google Docs.
Positive: Upside movement on the ratings is unlikely.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Technology Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Technology Companies
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John M. Witt, CFA, +1-212-908-0673
33 Whitehall Street
New York, NY 10004
Jason Paraschac, CFA, +1-212-908-0746
Jamie Rizzo, CFA, +1-212-908-0548
Brian Bertsch, +1-212-908-0549
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