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The computer and software industry is one of the most in-demand sectors in the present digital age. Information Technology is developing at a very fast rate and demand for the latest developments is rising by the day. The companies in this industry create computer software and programming services. The leading companies include Cognizant Technology Solutions (NASDAQ:CTSH), IBM Software (NYSE:IBM), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL) and Symantec (NASDAQ:SYMC). The greatest market of the software products is the U.S. economy, which forms about 70% of the market share.

The software industry evolves at a very high rate that causes the user to keep keen track of the latest trends and hence take advantage of the additional efficiency in the product. The most recent developments and innovations in the industry include the introduction of cloud computing and software as a service (SaaS), which allows the software vendors to avail their services via the Internet. This has been widely utilized by firms in the industry as a competitive edge. Mergers, partnerships, acquisitions and strategic alliances between business software companies have been prevalent in a bid to reduce competition and increase the production base.

According to the computer business review, the mergers and acquisitions recorded a 6% increase in FY 2012. The Internet has been the major contributor in the development and sale of the software services, but there has been a crisis between the Internet providers and software-developing companies as a result of prevalent software theft and release to the public by malicious operators and hackers. This has caused a major slump in the industry and still stands as the major concern in terms of sale of software through the Internet. The global IT spending increased by 1.2% in FY 2012, which is a fall from the previous rise by 7.9%.

However, Gartner asserts that the industry IT spending is expected to rise in FY 2013, with an estimated 4.2%. Gartner projects a total growth of 6.4% in the software industry in FY 2013 with estimated revenue reaching $300 billion. If this happens, the industry will have recorded a 6.8% growth rate from the FY 2011 to FY 2013. A further extrapolation of the growth rate in the industry indicates a consistent rise that may hit the $360 billion in FY 2016.

Microsoft Corp.

Microsoft is the mother firm in the computer software development and still takes the lead in the industry. The company is also engaged in design and sales of computer hardware. The firm operates in five segments, namely the Windows and Windows Live Division, the Server and Tools Online Division, the Microsoft Business division, and the Entertainment and Devices Division. The company offers a wide range of business and personal-based computer support inclusive of cloud computing as one of the recent developments in the industry. In FY 2011, the company acquired Skype Global Sarl and VideoSurf. Some of the most recent moves by Microsoft were the purchase of Edgewater Fullscope's Process Industries 2(PI2) software intellectual property, PhoneFactor, and Yammer in FY 2012. In the same financial year, Comcast (NASDAQ:CMCSA) acquired Microsoft's 50% stake. Microsoft has also acquired Netbreeze GmbH in FY 2013. The main competitors of Microsoft include Nintendo (OTCPK:NTDOF), Apple (NASDAQ:AAPL), Sony (NYSE:SNE), Google (NASDAQ:GOOG), and BlackBerry (NASDAQ:BBRY).

Financials

The chart below illustrates an excerpt of the income statement for Microsoft in the FY 2012 and FY 2013. The revenue has recorded a rise from $17,407 in FY 2012 to $20,489 in FY 2013. This can be attributed to the creative developments especially in the emerging and highly demanded applications. The ability to maintain high-quality and positive trends has earned the company good reputation and preference among the competing firms.

Income Statements (in Millions, Except Per Share Amounts)

Three Months Ended
March 31,

Nine Months Ended
March 31,

2013

2012

2013

2012

Revenue

$

20,489

$

17,407

$

57,953

$

55,664

Cost of revenue

4,787

3,952

14,647

13,367

Gross profit

15,702

13,455

43,306

42,297

Operating expenses:

Research and development

2,640

2,517

7,628

7,217

Sales and marketing

3,794

3,414

11,048

10,076

General and administrative

1,656

1,150

3,939

3,433

Total operating expenses

8,090

7,081

22,615

20,726

Operating income

7,612

6,374

20,691

21,571

Other income (expense)

(9)

(11)

216

337

Income before income taxes

7,603

6,363

20,907

21,908

Provision for income taxes

1,548

1,255

4,009

4,438

Net income

$

6,055

$

5,108

$

16,898

$

17,470

Earnings per share:

Basic

$

0.72

$

0.61

$

2.02

$

2.08

Diluted

$

0.72

$

0.60

$

1.99

$

2.05

Weighted average shares outstanding:

Basic

8,364

8,401

8,385

8,398

Diluted

8,429

8,498

8,472

8,502

Cash dividends declared per common share

$

0.23

$

0.20

$

0.69

$

0.60

Source: Gartner.

The company has recorded a rise in the earnings per share from 0.61 in FY 2012 to 0.72 in FY 2013. This is likely to rise higher in the subsequent years as the industry is potentially placed at an increasing growth rate. The shareholders will therefore continue to earn increased earnings on their investments in the firm. This is in addition to the cash dividends, payable to the shareholders at the end of the financial year.

Balance Sheet

The balance sheet indicates the actual financial position of Microsoft in two instances in the FY 2012 and FY 2013 in terms of the value of assets and liabilities. Microsoft has recorded a net increase in the total assets from $85,084 in FY 2012 to $93,524 in the first quarter of FY 2013. This has been from the increased infrastructural investments. The increase in the liabilities of Microsoft also increased from $121,271 in FY 2012 to $134,105 in FY 2013. This is an indication of the firm's leverage, which is maintained at a secure lever that does not jeopardize the company's financial structure.

Balance Sheets (in Millions)

March 31,
2013

June 30,
2012

Assets

Current assets:

Cash and cash equivalents

$

5,240

$

6,938

Short-term investments (including securities loaned of $493 and $785)

69,243

56,102

Total cash, cash equivalents, and short-term investments

74,483

63,040

Accounts receivable, net of allowance for doubtful accounts of $267 and $389

11,991

15,780

Inventories

2,133

1,137

Deferred income taxes

1,676

2,035

Other

3,241

3,092

Total current assets

93,524

85,084

Property and equipment, net of accumulated depreciation of $12,247 and $10,962

9,204

8,269

Equity and other investments

11,193

9,776

Goodwill

14,682

13,452

Intangible assets, net

3,240

3,170

Other long-term assets

2,262

1,520

Total assets

$

134,105

$

121,271

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

4,532

$

4,175

Current portion of long-term debt

2,246

1,231

Accrued compensation

3,474

3,875

Income taxes

689

789

Short-term unearned revenue

16,511

18,653

Securities lending payable

564

814

Other

3,913

3,151

Total current liabilities

31,929

32,688

Long-term debt

11,949

10,713

Long-term unearned revenue

1,394

1,406

Deferred income taxes

2,424

1,893

Other long-term liabilities

9,721

8,208

Total liabilities

57,417

54,908

Commitments and contingencies

Stockholders' equity:

Common stock and paid-in capital - shares authorized 24,000; outstanding 8,349 and 8,381

66,826

65,797

Retained earnings (deficit)

7,657

(856)

Accumulated other comprehensive income

2,205

1,422

Total stockholders' equity

76,688

66,363

Total liabilities and stockholders' equity

$

134,105

$

121,271

Source: Gartner.

Conclusion

Microsoft is one of the few companies in the computer software industry that has maintained a steady growth and profitability over a long period of time. The recent move to acquire possible competitors in the industry is a sure move to reduce competition and expand its operations all over the globe. As the leading firm in the industry, many firms emulate its moves and tactics in a bid to remain competitive in the market. The company is therefore a sure return investment for an investor, with minimal risks involved and a promising future based on the previous performance trends.

Source: Microsoft - A Definite Buy