Fitch Ratings has affirmed Microsoft Corp.'s (Microsoft)
ratings, including the Long-term Issuer Default Rating (IDR) at
'AA+'. The Rating Outlook is Stable. Fitch's actions affect
approximately $23.7 billion of total debt. A full list of ratings
follows at the end of this release.
KEY RATING DRIVERS
--Fitch's expectations that Microsoft Windows will remain the
primary operating system (OS) for servers and PCs, despite
lackluster adoption of Windows 8 and 8.1 for PCs, supporting
significant annual free cash flow (FCF).
--Microsoft's very strong liquidity, which is supported by $89.2
billion in cash and short-term (ST) investments (6.5% in the U.S.)
and Fitch expectations for annual free cash flow of roughly $15
billion. Fitch anticipates capital spending will remain elevated to
support cloud infrastructure development. Approximately $5.8
billion of cash and ST investments were held in the U.S. as of
Sept. 30, 2014.
--Microsoft's recurring revenue base related to long-term
commercial licensing agreements, which represents more than half of
total revenues.
--Fitch's expectations that increasing adoption of enterprise
cloud services will further diversify Microsoft's revenue base and
increase profitability, reducing the company's exposure to the less
defensible and profitable consumer PC market.
Ratings concerns center on Fitch's expectations that:
--Microsoft will continue relying on the PC market for the vast
majority of FCF, although Fitch expects faster growing cloud
services could reduce this risk over the longer-term.
--Competing free or lower cost operating systems may continue
reducing Microsoft's share, primarily in consumer and education
markets. Microsoft competes with Google in the tablet and
smartphone markets (Android - roughly 80%) and in the notebook PC
market (Chrome).
--Success in smartphone and tablet markets could remain modest
(below 5% share), despite significant investments and resource
allocation.
--Lackluster consumer PC demand, with the exception of Office
365 (SaaS), will remain pressured by extended PC replacement cycles
due to tablet and smartphone substitution for traditional PCs.
--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:
--Fitch's expectations that total debt adjusted for rental
expense to operating EBITDAR sustained between 1x - 1.5x, most
likely from significant debt issuance to support shareholder
returns.
--Material profit margin erosion related competitive pressures,
including strong commercial adoption of the public cloud and/or
open-sourced software materially reduces demand for key Microsoft
products, penetration of alternative operating systems in the PC
market or market share gains by Apple, or greater acceptance of
cheaper software applications that compete with Microsoft
Office.
Positive ratings actions are unlikely in the absence of material
diversification, driven by solid organic growth in non-PC
businesses.
As of Sept. 30, 2014, Fitch believes liquidity is very strong
and supported by:
--$89.2 billion of cash and ST investments ($5.8 billion in U.S.
at Sept. 30, 2014); and
--An undrawn $5 billion revolving credit facility that backstops
a commercial paper (CP) program.
Fitch expectation for $15 billion of annual FCF also supports
liquidity.
Total debt was $23.7 billion at Sept. 30, 2014 and consisted of
various tranches of senior notes with staggered debt maturities and
$3.5 billion of CP borrowings. Microsoft's nearest debt maturity,
aside from CP borrowings, is $1.8 billion of senior notes due Sept.
25, 2015.
Fitch affirms the following ratings:
--Long-Term IDR at 'AA+';
--Senior unsecured debt at 'AA+';
--RCF at 'AA+';
--Short-Term IDR at 'F1+';
--Commercial paper (CP) program at 'F1+'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 4, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=959296
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Fitch RatingsPrimary AnalystJason PompeiiSenior Director+1
312-368-3210Fitch Ratings, Inc.70 West Madison St.Chicago, IL
60602orSecondary AnalystDavid PetersonManaging Director+1
312-368-3177orCommittee ChairpersonMichael WeaverManaging
Director+1 312-368-3156orMedia Relations, New YorkBrian Bertsch, +1
212-908-0549brian.bertsch@fitchratings.com