Microsoft Corp

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Intelligent Cloud: • Revenue ↑ 14%. ➢ Contribution of Azure. ➢ Enterprise Services revenue up by 3%. • Operati
Microsoft Corp 21 February 2018

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Contents 1. 2. 3. 4. 5. 6.

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Nature of business Recommendation Financial review Divisional review Company guidance Portfolio guidance

01 Nature of business 3 Copyright © PSG

Nature of business • Multinational technology company • Develops, manufactures, licenses, sells, supports: ➢ ➢ ➢

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Computer software products Consumer electronics Personal computers and services

02 Recommendation 5 Copyright © PSG

Recommendation • • • • • • • •

Forward P/E multiple ahead of long-term average Expectations for accelerated growth fairly reflected in share price Revenue should show growth in medium term given cloud offerings Competitive advantage to leverage existing commercial relationships Cloud momentum should offset secular decline in traditional PC revenues Cloud increases annuity income profile Cloud revenue will be supported by Azure Stack offering Negative margin impact of a bigger contribution from lower margin Azure revenue should be offset by: -

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Higher margins in More Personal Computing segment Improved Azure margins from capacity utilisation and growth in Azure’s premium services

03 Financial review 7 Copyright © PSG

Financial review • Revenue ↑ 12% to $53.5bn -

Driven by cloud offerings, Azure and 365 product Inclusion of LinkedIn contributed $2.5bn (2017: $228m)

• Gross margin ↑ 1pp to 63.8% -

Driven by a more favourable revenue mix Higher margin in More Personal Computing segment

• Adjusted operating profit ↑ 12% to $16.4bn • Operating Margin ↑ to 30.7% (2017: 30.6%) -

Higher expenses reflect acquisition of LinkedIn Investments in commercial sales capacity and a higher R&D expenditure

• Adjusted EPS ↑ 19% to 180 US cents • EPS - 4 US cents -

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Significant once-off tax adjustments

04 Divisional Review 9 Copyright © PSG

Divisional Review Productivity and Business Processes

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Divisional Review Intelligent Cloud

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Divisional Review More Personal Computing

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Divisional Review

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Divisional Review

• Productivity and business processes: • Revenue ↑ 26% ➢ Contribution of LinkedIn

• Operating margin ↓ to 36.9% (2017: 43.8%) ➢ ➢ ➢ ➢

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LinkedIn’s operating expenses Investments in cloud Investments in sales capacity Impact of legal benefit in previous period

Divisional Review

• Intelligent Cloud: • Revenue ↑ 14% ➢ Contribution of Azure ➢ Enterprise Services revenue up by 3%

• Operating margin ↑ to 33.8% (2017: 31.6%) • Operating expenditure contained ➢ Offset by gross margin pressures from growing contribution of cloud business

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Divisional Review

• More Personal Computing: • Revenue ↑ 1% ➢ Driven by higher Surface sales, gaming, Windows and search sales ➢ Offset a decline in mobile devices

• Operating margin ↑ to 23.6% (2017: 21.6%) ➢ Driven by higher gross margins ➢ More favourable sales mix ➢ Higher device margins

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05 Company guidance 17 Copyright © PSG

Company guidance • Guidance provided for Q3 2018: • •

Exchange rate impact will increase revenue by 2%, cost of sales by 1% and operating expenses by 1% Productivity and business processes revenue between $8.6bn and $8.8bn -



Intelligent Cloud revenue between $7.55bn and $7.75bn -



Increase of between 8% and 11% y/y Increase between 12% and 15% y/y

More Personal Computing revenue between $9.1 and 9.4bn -

Increase of between 3% and 6% y/y

• Guidance provided for FY 2018: • • • 18 • Copyright © PSG

Stable gross margins Operating margin slightly ahead of previous year, including LinkedIn More than a 1% increase in operating margin, excluding LinkedIn Effective rate of around 16% for 2018, slightly below statutory rate of 21% in 2019

06 Portfolio guidance 19 Copyright © PSG

Portfolio Guidance • •

Fairly valued at current levels Recommend portfolio exposure of 0.00%

Source: Bloomberg

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