Microsoft Joins the Triple-A Club

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The ratings on Microsoft reflect the company's excellent operating performance and financial profile. The company maintains a vertically integrated and diverse product portfolio with numerous leadership positions, a broad geographic footprint, and minimal financial risk.

"While we view the high-tech industry as possessing higher-than-average business risk, we regard software companies more favorably due to the recurring nature of the business, significant barriers to entry, and strong cash-flow generation," says Standard & Poor's credit analyst Philip Schrank.

Competitive Advantages

Although there will continue to be technology shifts, it is Standard & Poor's view that Microsoft will maintain the technical, managerial, and financial wherewithal to adapt to industry transitions as successfully as it has in the past (such as incorporating Internet and mobile functionality within its product sets).

With fiscal 2008 revenues exceeding $60 billion, Microsoft is almost three times the size of the next largest software provider. Microsoft's competitive advantages include:

• By far the leading supplier of PC operating-system (OS) software and a strong market position in enterprise OS software;

• High customer retention due to high OS software switching costs;

• A large and diverse base of customers across the consumer, small-and-midsize business, and enterprise segments;

• The ability to leverage the scale of its product and customer base into leading positions in software applications and development tools and to expand into higher-growth markets such as online services.

• A balance of established, mature products and a growing position in emerging and/or high-potential markets such as online advertising and entertainment and devices.

The company's competitive position is further supported by a track record of above-industry revenue growth (averaging in excess of 15% over the past three years), geographic diversity (55% international), broad distribution relationships, and very strong brand recognition. The previously mentioned factors generate a large and highly profitable revenue base, which in turn enables Microsoft to sustain and expand its market position through an unequaled level of investment in research and development—about 14% of total revenues.

The stable outlook reflects our expectation that Microsoft will maintain very modest leverage and a commitment to the highest level of credit quality, coupled with a conservative strategy of largely organic growth. While not expected, the most likely cause of an outlook revision or ratings downgrade would result from an acquisition or share repurchases that would materially increase the company's leverage. Given Microsoft's leadership position in many segments, it is unlikely that many very large acquisitions would be available that would receive regulatory approval.