Microsoft's financial performance and operating expenses, 2004-2008

Financial Accounting

Company Overview

Microsoft is the top global producer of software applications in the order, specializing on a diversified range of segments of such products, including operation systems (Microsoft Windows), spreadsheets and text applications (the Microsoft Office suite), as well as other products. Started in the 1970s by current chairman of the board, William Gates III (Bill Gates), the company has always been renowned for its innovation and leadership on the market.

The current leadership of the organization (as of the 2008 Annual Report) includes Bill Gates as chairman of the board of director, Steve Balmer as Chief Executive Officer, Ray Ozzie as Chief Architect Officer, in charge with new product development and Craig Mundie as Chief Research and Strategy Officer.

As a global company, Microsoft has based its activities at an international level, counting important increases and developments in markets such as those in Asia (China and India) and Central and Eastern Europe. Its product portfolio is likely to diversify to include more online applications, including search applications to rival Google.

Part II -- Financial Overview

Fiscal Year Ended June 30

2008

2007

2006

2005

2004

Revenue

$60,420

$51,122

$44,282

$39,788

$36,835

Percent change in revenue

18.19%

15.45%

11.29%

8.02%

Net income

$17,681.00

$14,065.00

$12,599.00

$12,254.00

$8,168.00

Percent change in net income

25.71%

11.64%

2.82%

50.02%

As we can see from the figures above and the chart below, both the net revenue and net income at Microsoft continued to increase at an important pace from 2004 to 2008. In 2008, the last analyzed year, the net income grew with a bigger rate than the net revenue, showing that the company was able to minimize operating expenses, while, at the same time, increasing revenues. The greatest increase in net income was, however, from 2004 to 2005, with 50.02%.

Operating Expenses

2008

2007

2006

Cost of revenue

11,598

10,693

7,650

Research and development

8,164

7,121

6,584

Sales and marketing

13,039

11,455

9,818

General and administrative

5,127

3,329

3,758

Total operating expenses

37,928

32,598

27,810

The operating expenses at Microsoft are well distributed between the cost of revenue, research and development, sales and marketing and general administrative expenses. The only observation that could be made here is that one would expect a larger proportion of the total expenses to be allocated to research and development, given the fact that this is such an important part of Microsoft's activity and essential in order to obtain a competitive advantage on the market.

Asset and Capital Structure

2008

Cash and cash equivalents

$10,339

Accounts receivable

$13,589

Inventories

$985

Total fixed assets

$29,551

The asset structure at Microsoft reflects some of the particularities in the industry, notably the fact that the inventory levels tend to be quite low, as compared to the other assets. This means that the IT industry is not one supporting production on stock. At the same time, the value of the total fixed assets is significantly high, which can be partly explained by the size of the company and the investments in land, buildings and equipment.

Part IV -- Conclusions and Recommendations

Microsoft's results, both in terms of absolute value from the income and cash flow statements and balance sheet and the ratio analysis, show a solid, extremely competitive company, whose results have improved from 2007 to 2008, despite the global economic crisis. Its capacity to retain low levels of inventory, to gradually increase its efficiency in using assets and to bring new products to the market are some of the positive aspects at Microsoft. As a recommendation, the company could consider allocating a larger proportion of its expenses into research and development.