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Microsoft Corp CAPEX surged on 43.1% and Revenue surged on 14.3%

07/19/2018 • About Microsoft Corp ($MSFT) • By InTwits

Microsoft Corp reported FY2018 financial results today. Overall the company's long term financial model is characterised by the following facts:
  • EBITDA Margin is expanding: 42.5% in FY2018 vs. 40.5% in FY2017 vs. 38.0% in FY2014
  • Microsoft Corp has medium CAPEX intensity: 5 year average CAPEX/Revenue was 8.2%. At the same time it's in pair with industry average of 10.5%
  • The company has highly profitable business model: ROIC is 19.5%
  • It operates with medium-size leverage: Net Debt/EBITDA is 1.6x while industry average is 1.6x
Below you can find a comprehensive analysis of the key data driving the company's performance and the stock price.

Revenue and profitability

The company's Revenue jumped on 14.3%. Revenue growth showed acceleration in FY18Q4 - it increased 17.5% YoY. During the last 5 years Revenue growth bottomed in FY2016 at -2.6% and was accelerating since that time. Revenue growth happened at the same time with EBITDA margin expansion. EBITDA Margin increased on 2.0 pp from 40.5% to 42.5% in FY2018. During the last 5 years EBITDA Margin bottomed in FY2015 at 25.8% and was growing since that time.

Gross Margin increased slightly on 0.72 pp from 64.5% to 65.2% in FY2018. During the last 5 years Gross Margin bottomed in FY2016 at 64.0% and was growing since that time. SG&A as a % of Revenue decreased slightly on 0.51 pp from 20.7% to 20.1% in FY2018. SG&A as a % of Revenue declined at -0.80 pp per annum in the last 5 years. Stock Based Compensation (SBC) as a % of Revenue showed almost no change in FY2018. SBC as a % of Revenue followed a growing trend at 0.21 pp per annum in FY2014-FY2018.

Net Income margin dropped on 11.4 pp from 26.4% to 15.0% in FY2018. The efficient tax rate was 54.6% in FY2018 while the average for the last five years was 30.0%.

Investments (CAPEX, working capital and M&A)

Microsoft Corp's CAPEX/Revenue was 10.5% in FY2018. CAPEX/Revenue increased on 4.2 pp from 6.4% in FY2015 to 10.5% in FY2018. It's average level of CAPEX/Revenue for the last three years was 9.4%. CAPEX as a % of Revenue stuck to a growing trend at 1.1 pp per annum in FY2014-FY2018.

Accounts receivable as a % of Revenue increased slightly on 0.77 pp from 23.2% to 24.0% in FY2018. Inventories as a % of Revenue showed almost no change at 2.4% in FY2018. Accounts payable as a % of Revenue increased slightly on 0.90 pp from 21.6% to 22.5% in FY2018.

Microsoft Corp has spent $888m on M&A in FY2018 which accounts for 0.80% of revenue.

Return on investment

The company operates at good ROIC (19.5%) and ROE (19.4%). ROIC increased on 2.2 pp from 17.3% to 19.5% in FY2018. ROE dropped on 10.4 pp from 29.8% to 19.4% in FY2018.

Leverage (Debt)

Debt level is 1.6x Net Debt / EBITDA and 1.9x Debt / EBITDA. Net Debt / EBITDA dropped on 0.6x from 2.2x to 1.6x in FY2018. Debt decreased on 8.4% while cash jumped on 55.9%. During FY2014-FY2018 Net Debt/EBITDA topped in FY2017 at 2.2x.

Microsoft Corp has good short term financial stability: Interest coverage ratio (ICR) is 13.4x. Microsoft Corp has no short term refinancing risk: cash is higher than short term debt (214.4%).

Average interest expence paid by the company was 3.1% in FY2018.

Valuation and dividends

Microsoft Corp's trades at EV/EBITDA 19.6x and P/E 50.8x.

The company paid 76.6% of Net Income as dividends in FY2018. Dividends grew on average at 7.4% per annum in the last 5 years).

Management team

Microsoft Corp's CEO Satya Nadella has spent 5 years with the company. CEO total compensation was $25,843,263 in FY2018 which included $1,500,000 salary. Amy E Hood is a the company's CFO. Amy E Hood has spent 3 years at the company.

The company has 1.4% shares owned by insiders. Insider ownership didn't change in 2018.

At the end of financial year the company had 131,000 employees. The number of employees increased on 5.6%. Average revenue per employee in FY2018 was $842,443 and it increased on 8.2%.

Financial and operational results

FY ended 06/30/2018

Microsoft Corp ($MSFT) key annual financial indicators

mln. $201420152016201720182018/2017
Gross Profit59,75560,54258,37462,31072,00715.6%
Interest expence5977811,2432,2222,73323.0%
Net Income22,07412,19320,53925,48916,571-35.0%
Stock Based Compensation2,4462,5742,6683,2663,94020.6%
Balance Sheet
Accounts Receivable19,54417,90820,63622,43126,48118.1%
Accounts Payable7,4326,5916,8987,3908,61716.6%
Short Term Debt2,0007,48412,90411,6575,573-52.2%
Long Term Debt20,64527,80844,81483,87081,935-2.3%
Cash flow
Revenue growth11.5%7.8%-2.6%5.9%14.3%
EBITDA growth8.0%-26.9%39.7%16.0%19.9%

Gross Margin68.8%64.7%64.0%64.5%65.2%0.7%
EBITDA Margin38.0%25.8%37.0%40.5%42.5%2.0%
EBIT Margin32.0%19.4%29.7%31.4%33.2%1.8%
SG&A, % of revenue23.6%21.7%21.1%20.7%20.1%-0.5%
SBC, % of revenue2.8%2.8%2.9%3.4%3.6%0.2%
Net Income Margin25.4%13.0%22.5%26.4%15.0%-11.4%
CAPEX, % of revenue6.3%6.4%9.2%8.4%10.5%2.1%

Net Debt/EBITDA0.4x1.2x1.5x2.2x1.6x-0.6x
Interest expence / Average debt2.6%2.7%2.7%2.9%3.1%0.2%
Insider ownership1.4%1.4%1.4%1.4%1.4%0.0%
Revenue/Employee, th. $6787938007798428.2%

Microsoft Corp ($MSFT) key quoterly financial indicators

mln. $FY18Q1FY18Q2FY18Q3FY18Q4 YoY change
Revenue24,53828,91826,81930,085 11.9%12.0%15.5%17.5%
EBITDA10,59511,61411,39713,298 24.2%15.3%24.2%32.6%
Net Income6,576-6,3027,4248,873 16.0%-200.6%35.3%10.0%
Balance Sheet
Cash6,88412,8599,22111,946 -50.6%51.9%37.4%55.9%
Short Term Debt10,61817,4115,2405,573 -27.0%-32.2%-32.7%-52.2%
Long Term Debt85,15082,73483,38181,935 41.6%39.5%9.4%-2.3%
Gross Margin66.3%61.7%65.4%67.6% 2.0%0.1%0.2%0.6%
EBITDA Margin 43.2% 40.2% 42.5% 44.2% 4.3%1.2%3.0%5.0%
Net Income Margin 26.8% -21.8% 27.7% 29.5% 1.0%-46.1%4.0%-2.0%

Peers in Software

Below you can find Microsoft Corp benchmarking vs. other companies in Software industry. It's shown for the period of 5 years for the key financial metrics. Each table has median value for all the companies in the industry together with individual financial data of the top-5 companies in the industry by particular financial metric.