Fitch Affirms Microsoft's IDR at 'AA+'; Outlook Stable

NEW YORK -- (BUSINESS WIRE) -- Fitch Ratings has affirmed the following ratings for Microsoft Corp. (Microsoft):

--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.

The affirmations reflect the following considerations:

--Fitch anticipates modest revenue growth in FY 2012. Fitch expects declines in PC unit volume in 2012 reflecting hard disk drive shortages and macroeconomic concerns which should lead to declines in Microsoft's Windows revenue. Fitch expects this to be offset by continued strong business and server segment revenue growth reflecting enterprise demand.

--Fitch believes Microsoft's position in the handset and tablet market has improved significantly over the past 12 months owing 1) to licensing agreements with Android device manufacturers and original design manufacturers that now cover in excess of 50% of all Android unit shipments and generate an estimated $5 to $15 per unit, and 2) a revamped version of the Windows phone and the expected launch of Windows 8 in 2012 which is tailored for tablet computers. Additionally, Microsoft's partnership with Nokia should meaningfully contribute to market share gains in FY 2012.

--Fitch believes that Xbox sales could trail off as consumers begin to delay purchases in anticipation of a new platform. However, Fitch believes that Microsoft's current positioning in the entertainment space bodes well for its competitiveness over the next 12 to 24 months, particularly as Xbox's hardware platform, Xbox Live, and Kinect controller become integral pieces of a longer-term strategy of consumer-oriented offerings. Fitch believes Microsoft may need to invest in its content offerings which could pressure margins going forward.

--Fitch believes Microsoft's Bing search engine platform, which has continued to gain market share but remains a drag on profitability, remains a critical component of a longer-term strategy in the consumer market and can serve as a platform to monetize services across the mobile, PC and Xbox platforms.

--Fitch expects Microsoft to continue to produce strong FCF, in excess of $15 billion per year, which the company utilizes 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 next several years excluding potential for meaningful acquisitions. Microsoft has $11.2 billion remaining under its current share repurchase authorization that expires in September 2013. Fitch expects all repurchases will be done within the context of free cash flow.

--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 position.

Credit Strengths:

--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 $57 billion in cash and short term investments partially offset by $12 billion in debt. 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 revenue;

--Industry leading liquidity, supported by a considerable cash position and consistent strong free cash flow.

Credit Concerns:

--Reliance on Windows and Office for vast majority of FCF and potential high correlation between the two business segments if alternative operating systems take meaningful PC market share. Microsoft's Windows and Office segments account for approximately 90% of total EBIT;

--Growing popularity of other operating systems outside of the core PC space, principally Apple's iOS as well as Google's Android platform. Fitch believes both platforms will continue to grow as competitive threats to Windows.

--Minimal historical success in developing profitable businesses outside of Microsoft's core Windows and Office ecosystem despite significant investment over a decade-plus in other consumer markets which Fitch believes is indicative of the challenging competitive environment Microsoft has targeted.

--Significant dividend and share repurchase programs, although 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.

Total liquidity as of Sep 30, 2011 was solid and consisted principally of $12.9 billion in cash and equivalents as well as $45 billion in short-term investments. Fitch believes that the majority of the company's cash and investment balance is located overseas and would be subject to incremental taxes (Fitch estimates approximately 15% to 20% incremental taxes) if the company needed to access these funds. Free cash flow of $19.7 billion in the latest 12 month period ending Sep 2011 further supports liquidity although the majority of cash flow is generated outside the U.S..

Total debt as of Sept. 30, 2011 was $11.9 billion and consisted principally of: i) $1.25 billion in 0% convertible notes due June 2013; ii) $1 billion in 0.875% notes due September 2013; iii) $2 billion in 2.95% notes due June 2014 but callable in January 2012; iv) $1.75 billion in 1.625% notes due September 2015; v) $750 million in 2.5% notes due February 2016; vi) $1 billion in 4.2% notes due June 2019; vi) $500 million in 4% notes due February 2021; vii) $1 billion in 3% notes due October 2020; viii) $750 million in 5.2% notes due June 2039; ix) $1 billion in 4.5% notes due October 2040; and x) $1 billion in 5.3% notes due February 2041. Microsoft's 'F1+' short-term IDR and commercial paper rating reflect Microsoft's very strong liquidity profile in absence of 100% backstop of the commercial paper facility.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Evaluating Corporate Governance' (Dec. 16, 2010);

--'Rating Global Technology Companies Sector Credit Factors' (Sept. 20, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

Rating Global Technology Companies - Specific Rating Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543285

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