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Fitch Affirms Microsoft at 'AA+'; Outlook Stable
December 19, 2013 / 6:51 PM / 4 years ago

Fitch Affirms Microsoft at 'AA+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 19 (Fitch) 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. Fitch also assigned an 'AA+' rating to Microsoft's $1.3 billion revolving credit facility (RCF), which serves as a backstop for the company's $1.3 billion CP program. Approximately $25 billion of debt is affected by Fitch's action, including Microsoft's issuance of $8 billion of senior notes on Dec. 6, 2013 and $1.3 billion RCF. KEY RATING DRIVERS The ratings and Stable Outlook reflect Microsoft's: --Strong core software position: Microsoft Windows remains the primary operating system (OS) for servers and PCs, despite lackluster adoption of Windows 8 for PCs to date. Windows has approximately 90% share of the PC market and Windows-based servers accounted for 50% of total server revenue in the third quarter of 2013, according to IDC. Microsoft's Office is also the leading software productivity suite, particularly in the commercial market. --Very strong liquidity: Liquidity is supported by nearly $81 billion in cash and short-term (ST) investments (94% offshore) as of Sept. 30, 2013 and consistent free cash flow (FCF), which totaled nearly $16 billion in the latest 12 months (LTM) ended Sept. 30, 2013. Fitch projects Microsoft's FCF (post-dividends) will decline to $13 billion in fiscal 2014 (ends June 30) compared with $17 billion in fiscal 2013. The decline primarily reflects a 55% increase in capital expenditures to $6.5 billion, equivalent to 3x the amount spent in fiscal 2012, for datacenters to support Microsoft's various cloud initiatives, including Azure and Office 365. --Material Recurring Revenue: Approximately 50% of Microsoft's revenue base is recurring from long-term commercial licensing agreements. --Highly Diversified Revenue Base: Microsoft's revenue base is diversified by end market with commercial and consumers representing 53.4% and 46.6% of total revenue, respectively, but the Devices and Consumer segment accounted for only 30% of segment operating profit, excluding corporate and other. The greater operating profit from the commercial business is significant because Fitch views Microsoft's consumer market as less defensible to competition from Apple and Google than the commercial business. Fitch's credit concerns center on: --Reliance on Windows and Office for Vast Majority of FCF: In aggregate, these products accounted for 77% 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%. --Competitive Threats to Core Business: Microsoft Windows competes with free or lower cost operating systems from Google in the tablet and smartphone markets (Android - 80% smartphone share) and in the notebook PC market (Chrome), primarily in the consumer and education markets, as traditional PC companies diversify their OS offerings beyond Windows in part due to Microsoft's release of its Surface tablet. Google Apps, an alternative to Microsoft's Office productivity suite, is available for free to consumers, supported by advertising revenue. Google Apps for government, education and business costs less than Office for commercial users. --Low Share of Tablets and Smartphones: Windows share of smartphone and tablet markets is increasing but remains below 5% in both markets, which are growing well in excess of the traditional PC market. --Weak Consumer PC Demand: Windows and Office, with the exception of Office 365 (SaaS), are being pressured by weak consumer PC demand, which reflects an extended PC replacement cycle due to the popularity of tablets and smartphones and consumer substitution of tablets in lieu of traditional PCs. --Pressure to Issue Debt: Significant dividend and share repurchase programs are likely to continue pressuring the company to issue debt to avoid repatriation of foreign earnings, which represent the majority of total annual FCF. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Strong commercial adoption of the public cloud and/or open-sourced software materially reduces demand for key Microsoft products, including Windows Server, SQL Server, System Center and others, pressuring overall financial results; --Penetration of alternative operating system's such as Chrome OS in the PC market and/or market share gains by Apple; --Greater acceptance of cheaper software applications that compete with Microsoft Office such as Google Apps. Positive: Upside movement on the ratings is unlikely at this time. Contact: Primary Analyst John M. Witt, CFA Senior Director +1-212-908-0673 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jason Paraschac, CFA Senior Director +1-212-908-0746 Committee Chairperson Jamie Rizzo, CFA Managing Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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