Rag to Riches Stories

Two different personalities, one dream: SUCCESS

US overview situation

US overview situation

An increase in the supply of money typically lowers interest rates, which in turns generates more investment and puts more money in the hands of consumers, thereby stimulating spending. 4

Sector: Technology

Industry: Computer Hardware

Market capitalization: $523.85B

Fiscal year: 09/27

Founded: 1976, by Steve Jobs, Steve Wozniak and Ronald Wayne

Employees: 110,000 full-time employeesPlayers characteristics

Sector: Technology

Industry: Business Software and services

Market capitalization:$ 419.19B

Fiscal year: 06/30

Founded: 1980, Paul Allen and Bill Gates

Employees: 118,000 full-time employees 1,25

Apple & Microsoft: Friendly Competitors

According to Microsoft ex-CEO, Ballmer:Nobody is really trying to compete with [Apple]. Whos really going after the mac, whos really going after the IPad?Microsoft is the only REAL competitor!Apple HardwareMicrosoft Software& Cloud Service

Real Magic Happens

"I believe that in a perfect world, an organization or user has Microsoft applications and backend services running on Apple endpoints."Chip PEARSON, former CEO of JAMF Software

JAMF Software, a mobile device management vendor for Apple products

Microsoft "makes many of the tools employees actually need to get their jobs done," Dawson says. "Apple obviously does make alternatives for some of those tools, but in the vast majority of cases they're either inferior or simply not supported by IT departments."MacBooks and other Apple devices will be more compelling to enterprises if Microsoft starts treating that hardware as a "first-class citizen" for new Office apps and other software, according to Dawson. However, Apple also needs to continue to make it easier for businesses to deploy those devices at scale along with the Microsoft software they need."Except for Windows, Microsoft's elements will increasingly need to run on Apple hardware, so the companies will definitely be working together more," Dawson says. "The good thing is that Microsoft has stopped resisting this inevitable outcome, and is instead embracing a future that's as much about third-party devices as its own devices and operating systems."

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Apple Timeline

Microsoft Timeline

The usual game

Being the fastest to introduce technologies!!!

Gain competitive advantageGain market sharePartnership lossesUseless Intellectual propertyWaste of R&DIf you are the first to introduce the technology..

If you are late to the game

But guess what?Apple does not care!! Why? Opening weekend salesApple always breaks records.

Gain cometitive advantage = you reach to your customers first 9

If they were a country they would be Belgium

GDP= $523B

Iran

GDP=$419B

http://databank.worldbank.org/data/download/GDP.pdf

Opportunities Source: Pew Research Center survey conducted March 17-April 12, 2015. Smartphones data based in Pew Reasearch survey conducted June 10-July 12, 2015. Trend data are from previous Pew Research surveys.

51%23%29%42%First opportunity: Connectivity and globalization Second opportunity:Attractive servicesDelivering new productivity (work, play, communicate)Building and running cloud based servicesDeveloping new technologies to increase interactivity Making technology more intuitive to attrack a wider range of customersHuge opportunities to seize because of a growing demand

Potential threatsPeople want easy access to every softwareMany people complain about the slowness of updatesCustomers are attracted by design and ergonomicsMany competitors have the same suppliers =>shortageIssues with currency fluctuationsThe company needs to keep innovating and patenting to keep its competitive advantageApple orders raw materials based on projected demandApples reputation could be damaged by lawsuitsApple is subject to many different laws that could prevent its developmentApple could suffer from more choices from competitorsApple customers like new technologies and want to be amazedThere is a strong feeling of identity among Apple users that needs to be maintainedPeople need to be attracted to the products constantly Competitors cut prices and have low margins to attract customersIn bad economic conditions ressellers may find it no longer profitable to sell Apple products

Potential threatsMicrosoft may not earn the expected revenues from its intellectual property rights. Microsoft has lost market share because of underperforming software (WindowsVista)For example: Microsoft targets the gamer communityAcquisitions and joint ventures may have an adverse effect on their business.

StrategiesAppleMicrosoftUser experience / Ease-of useDesignInnovationOnce your in, youre LOCKED INMobile-first & Cloud-first WorldBest in class platformsProductivity services Individuals & Organizations

Marketing and AdvertisementHOW ??

Service: before & after saleKnowledgeR&D

Knowledgeable sales person & engineersM: 3 Interconnected Ambitions!Reinvestment productivity and business processesIntelligent cloud platformPersonal computing

Locked in: Same for MSFT14

How does Apple invest overall?R&DMarketingAdvertisingDevelop and sell innovative products and technologies Cash used in investing activities 201520142013$ in millions 56,27422,57933,774

Purchase of marketable securities net of sales and maturities ($44.4B)Purchase of PP&E ($11.12B) What for ?2.491.67Outside 4 more than inside

How does Microsoft invest overall?Cash used in investing activities 201520142013$ in millions 23,00118,83323,811

R&DMarketingAdvertising

Nokia $9.6BCash used in investment purchases, sales, and maturities $23BDeveloping new devices that have increasingly natural ways to interact with them. Applying machine learning to make technology more intuitive.

1.22

0.97

Portfolio Analysis-Apple

StariPhoneMac

Cash cowiTunesiCloudApple PayApple TV

DogiPodsMarket growth rateRelative market shareHIGHLOWHIGHLOW

Question MarksApple WatchiPads

SWOT Analysis-Apple

SWOT Analysis Microsoft

Who has more land ?

Manufacturing facilitiesOperation centersIrelandVietnamUSA (e.g. California)Ireland & SingaporeUSA (e.g. California)China & IndiaOverall leased building space Europe, China, Singapore and JapanChina; Finland; Germany; India; Japan; and UK

R&DStores

Microsoft stores in Puerto Rico, Canada, Australia & USApple 270 Stores

Link to currencies!20

ChinaApples Geographic Organization

AmericasGreater ChinaAsia PacificEuropeNorthMiddle EastEuropeIndiaSouthAustraliaTaiwanHong KongRest of Asia

includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Companys other reportable operating segments.21

Net Sales by Operating Segment (2013 to 2015)Total Net Sales in 2015: $234 billion

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Product life cycle - iPhoneStarting price in 2007: $599Starting price today: $649~38% depreciation/product the first yearThen, ~20%/year.Steps:1 Introduction 2 Growth3 Maturity 4 Decline5 New model New strategy: launch 2 products/yearBreaking News! Apple just launched an iPhone SE It is more affordable and answers demand for smaller screen customers.

The iPhone 6 (September 2014) and its mega-zoom camera was launched right after the apparition of the new Galaxy S5 (April 2014); people were amazed of the quality of such big picture!

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Product life cycle - iPod

First launch in 2001.Low source of income: categorized in other products in the Annual ReportWhy is it still on the market ? Because it brings in very young consumers that will be quickly locked in and will choose the iPhone later.Various modelsThe most accessible product: cheapDifferent renewal pattern than the iPhone

Product life cycle - iMac

The oldest product. The one that brought Apples notoriety. Still alive. Still growing.An example of hope for the iPods future?

Product life cycle - iPad

2010/2013: iPad 1;2;3;4.Display: 9.7 inches

2013/2014: iPad air 1 and 2 Display: 9.7 inches

2012/2015: iPad mini 1;2;3;4Display: 7.9 inches

2015: iPad proDisplay: 12.9 inches

Apple is losing its monopoly on tablets since share of shipments is decreasing since 2011.Analysts expect Apple to stagnate in this market, while Windows is supposed to grab 8% of market shares in the next 4 years.ALSO: Tablets is a very important segment because it locks customers in with apps, just swipe and pay! Main targets are children. 1 child out of 3 knows how to use a tablet before learning to speakSince October 2015, Microsoft is the top-selling tablet maker with 45% of all tablets sales, thanks to its surface pro at the average price tag of $844. The average price tag of Apple iPad, in the meantime, is only at $392.

https://www.strategyanalytics.com/strategy-analytics/news/strategy-analytics-press-releases/strategy-analytics-press-release/2015/11/23/tablets-windows-fast-becoming-a-premium-os-says-strategy-analytics#.Vug6t8fw6jy26

iTunes

Centralizes all customers data:- DevicesPurchases (Apps, music, movies, podcasts)- Back-ups- PicturesiTunes store sells or rents: -45,000 movies - 43,000,000 songs- 190,000 TV show episodes20112016Songs price0.991.29Apps price0.790.99

Since the euro got weaker:25 billion songs sold worldwide!Also known as: the padlock that locks customers in

Apple Pay

ProsCons

ImplementationTouch ID neededSpeedSafetyPushes customers to upgrade their phonesFixed source of income

Net Sales by Product

Net Sales by Product

Device & Consumer

P30 ANNUAL REPORT

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Revenue by Segment

ProductivitySoftwareUpgrade offersRevenue deferrals

Devices & ConsumerTotal Sales $ 41 501 10% $ 37 617 18% $ 32 007

P33 ANNUAL REPOROur D&C segments develop, manufacture, market, and support products and services designed to entertain and connect people, increase personal productivity, help people simplify tasks and make more informed decisions online, and help advertisers connect with audiencesOur Commercial segments develop, market, and support software and services designed to increase individual, team, and organizational productivity and efficiency, including simplifying everyday tasks through seamless operations across the users hardware and softwareCorporate and Other revenue comprises certain revenue deferrals (advanced payments of unearned revenue), including those related to product and service upgrade offers and pre-sales of new products to OEMs prior to general availability31

Operating system market shares: iOS v. Windows PhoneApple is currently selling 6 devices. Microsoft has 31 which involves higher manufacturing costs! It also means that MSFT has 0.05% of market share/phone in 2014, while 9.5% for Apple. Microsoft offers more diversity with its Lumias (price ranges, storage, customers age) while Apple has clearly defined productsWindows Phone struggles to enter the market due to its late arrival while Apple struggle in conquering emerging markets to the benefit of Android phones (Google)It cost $9.4B to enter this market to Microsoft by acquiring Nokia which generated only $1.2B in NI in 2015Apples in the market since 2007.Microsoft since 2011 when it bought Nokia.

Microsoft likes gaming

200120052013

20.4M units sold78.2M units sold24M units soldMain competitor is Sony and they sold 35.9M of PS4, 1.75 times more sales than the XBOX One. They sold the same amount of their old gen engine.Gaming revenue grew 6% in 2015There are over 40M XBOX live users paying a $50 annual subscription. It generates stable cash flow for MSFT.XBOX Sales decline since MSFT gave up on XBOX360, but software sales are up 57% mainly due to Halo 5 sales, and the apparition of Minecraft on the platform (which MSFT acquired).

Operating system market shares: OS X v. Windows

y= 0.0044x+0.0635y=-0.007x+0.9271OS X is only dedicated to Apple, while Windows englobes all the others brands.In addition, OS X market share is increasing

Advertising Advertising expense 201520142013 In billion $1.92.32.6

Advertising expense 201520142013In billion $1.81.21.1

Advertising includes Bing, Bing Ads, MSN, and Xbox ads. They have a partnership with Yahoo.A big part of their advertising is done by the retailers. Apple advertises on TV through movies In June 2015, MSFT entered into agreements with AOL and AppNexus to outsource their sales efforts.MSFT advertises through TV shows Advertises on TV through its own ads just before a product is launched Free advertisement from their own customers and the press at each product introduction (iMessage)The physical Apple store is a great tool to appeal to customers (design, displays, luxury)

OPENING WEEKEND SALES

26%74%Distribution and Brand Partnership-Apple

After-sale support experienceHigh quality fixturesApple Premium Reseller Program

Bought Beats6% increase by year

Knowledgeable salespersons

The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise, integration and support services. The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of education customers.

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Distribution and Brand Partnership-Microsoft

After-sale support experienceTraining to retailers

Direct OEMs, as our relationship with them is managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or more of our products with virtually all of the multinational OEMs, including Acer, ASUSTeK, Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, Toshiba, and with many regional and local OEMs.

lower-volume PC manufacturers (also called system builders), which source their Microsoft software for pre-installation and local redistribution primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.

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Brand Partnerships

Since July 2014Dec 2015 Reached 100 app milestone goal

Make the iPhone a Business communication tool

Since Sept 2015Sell Microsofts 2-in-1 device: Surface Pro

S: Training & ExpertiseM: SoftwareMicrosoft Partner Program

M&A: Bing (internet server) on Apple phones & Windows Azure uses Iphone apps (2013)

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Apples competitors by sector MusicVirtualStoresComputersSmartphonesMobile paymentsSpotifyTidalDeezerGoogle (YouTube)PaypalGoogleLenovoMicrosoftHPDellAcerGoogle (Play store)Microsoft (Windows phone store)GoogleSamsungHTCHuaweiBooksAmazonGoogle

COMPETITORS (fiscal year)AAPL (09/2015)GOOG (12/2014)MSFT (06/2015)FB (12/15)AMZN (12/15)IBM (12/2014)Market Cap ($M)523,850493,970419,190312,740245,360119,870Employees 118,000 61,814 110,000 12,691 230,800 380,000 Revenue 233,715 66,001 93,580 17,928 107,006 92,793 Cost of revenue 140,089 25,691 33,038 2,867 71,651 46,386 Gross Profit 93,626 40,310 60,542 15,061 35,355 46,407 R&D 8,067 9,832 12,046 4,816 9275 5,437 Acquisitions343 1,448 3,723 313 690 3,300 Net Income 53,394 14,444 12,193 3,669 596 12,022 Total Assets 290,479 131,133 176,223 49,407 65,444 117,532 Inventory 2,349 - 2,902 - 10,243 2,103 Net PPE 22,471 23,883 14,731 5,687 21,838 10,771 Total Liabilities 171,124 26,633 96,140 5,189 52,060 105,664 Long-Term Debt 53,463 3,228 27,808 107 8,235 35,073 Total Equity 119,355 104,500 80,083 44,218 13,384 11,868 Operating Cash Flow 81,266 22,376 29,080 8,599 11,920 16,868 Capital Expenditures (11,247) (10,959) (5,944) (2,523) (4,589) (3,740) Free Cash Flow 70,019 11,417 23,136 6,076 7,331 13,128 Beta1.350.861.020.731.630.66Gross Margin40.06%61.07%64.70%84.01%33.04%50.01%ROS22.85%21.88%13.03%20.47%0.56%12.96%ROE44.74%13.82%15.23%8.30%4.45%101.30%CCC (in days)(59)(127)29 (155)(82)(23)Debt/Assets58.91%20.31%54.56%10.50%79.55%89.90%Tax rate26.40%16.31%34.00%40.77%70.60%41.27%EPS $9.28 $23.59 $1.49 $1.29 $1.25 $13.42 P/E12.2432.1729.0185.22540.7110.25

Analysis of theTech GIANTS

Apple clearly leads the technology industryApple is the leader of these GIANT companies, with revenues 3.54X higher than GoogleNegative CCC: this means an important market power (receive cash from customers before paying suppliers)-> AAPL, FBApple has the biggest NI, 337% bigger than MSFT. AAPL does not seem to struggle to have positive earnings since it is above the competiton: high NI due to high selling prices PPE: FB is the lowest, no need to invest in buildings or stores since everything needed is a big computer and memory !R&D: for all companies, R&D at least 50% of NIExcept Apple: R&D 15% of the NIAAPL has the first worldwide capitalization. Since all the competitors of AAPL are giants, they deal with hundreds of billions.AAPL has the most assets and resources. High TA because 71% of TA are cash and investment! AAPL has 2.2x more TA than GOOG and 1.6x more TA than MSFTHowever, Apple has respectively 6.4 x more and 1.8 x more Liabilities than Google and MSFTThe riskiest company is AMZN; this can be explained by the fact that AMZN and FB have two different business models: AMZN is into everything (pricing issue), FB is into advertising.AMZN: high P+E, high inventory = high liability =high BETAFB: no P+E, no inventory+ high GM NI= low liabilities =low BETAAll the companies have high PE: this means investors think they have a high potential for growth.Normal PE is around 20: Google and FB are above.AMZN has an extremely HIGH PE, this means investors believe the company has a high potential for earnings growth (due to low NI mainly)!Positive CCC: this means companies need to borrow funds to pay their suppliers-> MSFTCOMPETITORS (fiscal year)AAPL (09/2015)GOOG (12/2014)MSFT (06/2015)FB (/12/15)AMZN (12/15)IBM (12/2014) Dividends Paid ($M) 11,561 47 8,882 - - 4,900 Repurchase of CS ($M) 35,253 4,155 14,443 - - 4,600

FCF is positive for all these Giant companies, with AAPL still leading. This means all these companies succeeded to create opportunities to grow (new products).There is a significant difference between AAPL v. AMZN and FB, the new companies : Apple 10X more.Apple and Microsoft give a huge part of their FCF to their shareholders !

Profitability: overall, high profitability, usually higher for technology companies (no big investment in inventories)Ex: FB: 84% GM ! HugeR&DAcquisitions

Acquisitions: MSFT invests a lot in startups and recently bought Nokia IBM also buys a lot of cloud companies (eg: Cleversafe, The Weather Company)FB : extremely low debt ratio! Does not need to borrow and has hardly any LT assets !AMZN and IBM: above 79%, this make these companies riskier

Growth Rates

EPS: -172%NI: -170%What happened in Q4 ??Q1: Santa Clause is coming to town!Overall GR= 34%

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Historical Revenues, Millions of $

1577.66%135.20%2.862.50

Apples revenue grew 1577.66% and Microsofts Revenue grew 135.20%In 2005, Microsofts revenues were 2.85 times bigger than Apples In 2015, Apples revenues were 2.50 times bigger than Microsofts.

NOT THE SAME SCALE

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Net Income comparison, in millions of $Gross margin remained constant BUT goodwill impairement rose by 6,193% with the acquisition of Beats costing $2.6BGross margin remained constant BUT impairment rose by 7,783% because of acquisitions of companies but mainly Nokia costing $7.9B.

Comparing Growth in Operations Apple sells more iPhones but growth rates fell because sales of iPads fell due to harsh competition !Apple introduces iPhone 6 and 6+ that have a larger screen. iPhone sales rose by $53.1b. Total sales rose by $50.9bSuccessful Samsungs large screen phone conquers the market and slows down Apples growth. Total sales only rose 9% while it was 45% the past year.

Put numbers !!!!!Five years of growth in a row except of Net income in between 2012 and 2013.

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Comparing Growth in Operation

COGS and especially Operating expense increased too much compared to the sales to maintain positive Earnings growth.

"And the upcoming release of Windows 10 will create new opportunities for Microsoft and our ecosystem. Satya Nadella, chief executive officer at Microsoft. Surface revenues and Xbox UP

Net income includes a $7.5b of goodwill impairment because phone hardware did not meet its sales volume goal . Also a $2.5b of restructuration expenses that represent 45% of previous year NI.

Net income decreased 36% because of a $6.2b goodwill impairment related to the OSD business segment that represents 27% of previous year NI.

Slower growth. Net income struggles to climb up because of goodwill impairments.Smaller % scale than Apple. 45

($M)One Day IS AppleOne Day IS Microsoft Period EndingSept 2015June 2015 Total Revenue649 100.0%260 100.0%Cost of Revenue389 59.9%92 35.3%Gross Profit260 40.1%168 64.7%Selling General and Administrative40 6.1%56 21.7%Research and Development22. 3.5%33 12.9%Impairment, integration, restructuring0.00 0.0%28 10.7%Operating Income or Loss198 30.5%50 19.4%Total Other Income/Expenses Net6 0.9%3.13 1.2%Earnings Before Interest And Taxes203 31.3%54 20.6%Interest Expense2 0.3%2 0.8%Income Before Tax201 31.0%51 19.8%Income Tax Expense53 8.2%18 6.7%Net Income148 22.8%34 13.0%

Comparative one day income statement 2015

4.4xApples NI is huge compared to Microsoft ! On a daily basis, their NI is 4.4 times higher than Microsoft !

2.5x64926035.3%59.9%13%22.8%Apple wants to offer the best to its customers and does not hesitate to give high warranty on its products and develop high-tech stores but at high costs !Rather low costs comparing to the overall financial results ! MSFT selling and administrative costs represent a bigger part of the total revenue. But MSFT is a monopoly and must spend cash to keep its position. This huge cost is due to impairment, integration and restructuring costs for the Phone Hardware business linked to the acquisition of NDS (write-down of certain assets, employee severance etc). Apples ROS is bigger on a daily basis than MSFT!BUT: if there were no restructuring costs and write-offs-> MSFTs ROS = AAPLs ROSEven if Apple spends less cash in acquisition compared to Microsoft, they still KILL the Game !However, MSFT by acquiring tries to develop the mobile-first, cloud-first world. It tries to diversify contrary to Apple and takes risks to attract new customers through a wide range of services.Not extremely high Gross Profit ! (average 50%) MSFT: High GP (Monopoly in PC software)Due to increase in revenues after the release of Surface 3 and introduction of HoloLens

+ 10%23%0

HoloLens : pair of mixed reality head-mounted smartglasses developed and manufactured by Microsoft Corporation. HoloLens gained popularity for being one of the first computers running the Windows Holographic platform under the Windows 10 operating system. It was introduced with operating systems, such as Android, iOS and OS X on April 5, 2016.The pre-production version of HoloLens, the Development Edition, is expected to ship 30 March 2016, and is targeted to developers in the United States and Canada for a list price of $3,000

announced the restructuring of our Phone Hardware business to run it more effectively near-term while driving reinvention longer term.We completed 16 acquisitions, including Mojang Synergies AB (Mojang), the Swedish video game developer of the Minecraft gaming franchise, and others, to strengthen our cloud platform and invest in mobile applications.

An impaired asset is a company's asset that is worth less on the market than the value listed on the company's balance sheet.

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Comparative IS Horizontal Analysis ($M) APPL MSFT Period Ending Sept 26, 2015 Sept 27, 2014 V V% June 30, 2015 June 30, 2014 V V% Total Revenue 233,715 182,795 50,920 27.9% 93,580 86,833 67477.8% Cost of Revenue 140,089 112,258 27,831 24.8% 33,038 27,078 596022.0% Gross Profit 93,626 70,537 23,089 32.7% 60,542 59,755 7871.3% Selling General and Administrative 14,329 11,993 2,336 19.5% 20,324 20,488 -164-0.8% Research and development 8,067 6,041 2,026 33.5% 12,046 11,381 6655.8%Impairment, integrating, restructuring etc. - - - - 10,011 127 98847782.7% Operating Income or Loss 71,230 52,503 18,727 35.7% 18,161 27,759 -9598-34.6% Total Other Income/Expenses Net 2,018 1,364 654 47.9% 1,127 658 46971.3% Earnings Before Interest And Taxes 73,248 53,867 19,381 36.0% 19,288 28,417 -9129-32.1% Interest Expense 733 384 349 90.9% 781 597 18430.8% Income Before Tax 72,515 53,483 19,032 35.6% 18,507 27,820 -9313-33.5% Income Tax Expense 19,121 13,973 5,148 36.8% 6,314 5,746 5689.9% Net Income 53,394 39,510 13,884 35.1% 12,193 22,074 -9881-44.8%

35.1%(44.8%)2.5

4.4WHY? HOW?27.9%7.8%24.8%22.0%32.7%1.3%This is due to Phone Hardware and the rise in cost of Commercial Cloud.(datacenters expenses)33.5%5.8%R&D of Apple is growing by 33.5% which is good because it predicts good future, but R&D of Microsoft only grows 5.8%. IT should be high as they are high tech companies. But Microsoft is buying its technology.10,0117782.7%This is due to the acquisition of Nokia. 33.5%(34.6%)90.9%Due to higher outstanding long-term debt.30.8%

Lets look at the overall picture:Total revenues of Apple are 2.5 times bigger than microsoft but Apples NI is 4.4 times bigger. How why? First NI of Apple rose by 35.1% while NI of Microsoft fell 44.8%Second, Revenues of Apple grew faster than revenues of Microsoft Third: For Apple CGS rose slower than sales =>good but for Microsoft CGS rose faster than sales because of computer hardware and cost of Commercial Cloud.

R&D for Apple grows by 33.5% => good because its done internally But for Microsoft its only 5.8% so not great since they are in the same sector and should spend as much. Microsoft $10B expense for Nokia=> major impact on Operating income Operating income/ is only logical for both companies. Microsoft pays the price of its acquisition

The interest expense V% is high for both companies. Apple has to borrow to keep its promises to its investors and microsoft needs the cash as well to survive.

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Operating Leases

-Remain stable over time- Leases equipment and facilities such as the 463 retail stores-Decrease over time-Leases for international sales and support offices, R&D facilities, retail stores

Thereafter: AAPL leases more than Microsoft, proof they probably want to increase the number of stores. MSFT will also follow this strategy but on a different scale.

Comparative BS: Total Assets290 B231 B25%Sales Growth: 28%176 B172 B2%Sales Growth: 8%x 1,6

70% of TA =Cash + STI + LTI21 B13 B52%82%

30 %31 %56 %

11%6 B9 B-35%90 B77 B18%

71 %66 %-16%-30%51 %44 %

Biggest Asset

56 %Biggest Asset26%11 B20 BSmall InventoryThey buy RM, and sell it to manufacturing co.5%12B15B-17%20B17B

MSFTs acquisitions are being written offGoodwill: Overpaid NokiaWHY?To popularize the phoneAAPL is inventing technologyMSFT is acquiring technology

Unearned revenue (p39 msft)

Inventory: FIFO method49

Comparative BS: Total Liabilities and Owners Equity42%171 B-11%120 B35%18 B60%40%50%50%119 B112 B55%45%48%52%

-345M1B-132%21 B28 B9 B84%92B87B18%-48%NO CHANGE-10%-32%7%16%

Change in Capital Structure35B25B30B18BExpense beforecash payment4%3%Got the cash, havent performed service yet!35%To be paid in the year1%1%LT DEBT! 53B29BForeign currency adjustments: USD Others Change in Capital Structure83B96B7B5B7B5B23 B13 %Got the cash, havent performed service yet!150%5B2BEnjoying favorable interest rate cheap lines of credit to facilitate further expansion.1.2 %1.2 %90B80B68B68B

The 48% and 32% Decrease (MSFT) is Dividend share buy back (bought back more than NI) Accrued expense: eg: Warranty

MSFT: big portion of TL is Unearned revenue: Software updates. They have a post-contract customer support (PCS) which records deferred revenue from the implied PCS term. Technology guarantee programs are received before the service is provided: customers receive free or significantly discounted rights to use upcoming new versions of a software product if they license existing versions of the product during the eligibility period.Revenue related to phones, Surface devices, Xbox consoles, games published by us, and other hardware components is generally recognized when sale is done. A portion of revenue may be deferred when these products are combined with software elements, and/or services. 50

Short Term Investments

More Cash than ReceivablesAlmost no InventoryMore Receivables than CashIn 10 years 770% Increase of CAIn 10 years 160% Increase of CA

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Why ?? Capital Structure: Debt/Equity

Inversed their Capital Structure: 40% 60% Debt2) KD: 1,85%. As D grows to 60% Apples WACC falls Cost of Capital falls1) Using Domestic Cash Reinvesting in Itself! 3) Interest Expense is tax deductible (D) Dividend Payments (E) are not! Saving more money AGAIN !Same story: Inversing their Capital Structure.Most of IT companies cash is overseas: It looks like their debt is big but in fact their money is just overseas.Borrowing money to pay dividend because it is cheaper than to bring cash home which is taxed .

http://www.fool.com/investing/general/2013/05/01/the-brilliance-of-apples-new-capital-structure.aspx 52

Debt

Apple believes its existing balances of cash will be sufficient to satisfy its working capital needsIn 2014, Apple issued commercial paper in order to pay for its dividends and share repurchasesAt the end of Q4 2015, these commercial papers represent an amount of $55.7 billion

Credit rank: Apple: AA+Microsoft: AAAApples cost of debt is 1.47% and Microsofts 2.70% (and yet, is has the best rating)Overseas cash is a risk to valuations. S&P 500 companies have an estimated $2.3 trillion in earnings stashed overseas, along with $750 billion in cash.Why would Apple need a loan?It has even more cash than Microsoft!Microsoft has $108.3B of earnings permanently reinvested overseas while Apple has $91.5b

When IRs are low, borrow as much as you can for as long as you can53

($M) AAPL MSFT Period Ending Sept 26, 2015Jun 30 2015 OPERATING CASH FLOW Net income 53,394 12,193 Depreciation Expense 11,257 5,957 (Increase) Decrease in Asset impairment (500)3,188 (Increase)Decrease in Account Receivable 611 1,636 (Increase) Decrease in Inventories (238)(242) Increase in other Current Assets (4,696)(1,043) (Increase) Decrease in Other Assets (1,792)469 Increase (Decrease) in Account Payable 5,294 (841) Increase (Decrease) in Accrued expense 6,728 (17) Increase (Decrease) in deferred revenue 449 73 Increase (Decrease) in differed revenue non-current 593 87 Increase (Decrease) in other non-current liabilites 8,601 2,057 TOTAL OPERATING CASH FLOW 79,701 23,517 INVESTING CASH FLOW Capital expenditure (13,104)(7,677) Purchase of short-term marketable securities (9,248)(13,891) Purchase of long-term marketable securities (33,903)2,544 Sales (purchases) intangible asset 249 2,146 Other comprehensive income (1,427)(1,186) Increase (Decrease) in Security lending payable (466) TOTAL INVESTING CASH FLOW (57,433)(18,530) FINANCING CASH FLOW Dividend paid (48,262)(20,807) Issuance of long-term debt 24,476 7,163 Increase (Decrease) in commercial paper 2,191 Issuance of common stock and PIC-CS 4,103 99 Increase (Decrease) in current portion of long-term debt 2,500 5,484 Purchase of Treasury Stocks TOTAL FINANCING CASH FLOW (14,992)(8,061) CHANGE IN CASH 7,276 (3,074)

Comparative Cash Flow

AAPL2015 Cash and Cash Equivalents, Beginning of Period 13,844 Cash and Cash Equivalents, End of Period 21,120 MSFTCash and Cash Equivalents, Beginning of Period8,669 Cash and Cash Equivalents, End of Period5,595

13,84421,1207,2768,6695,595(3,074)79,70179,701Apples NI was the biggest driver of OCF (67%)53,39423,517Still huge12,193(57,433)(33,903)(13,891)(18,530)

X3.39X3.10

3,188Microsofts goodwill impairment highly increased because of the purchase of companies such as Nokia ($5.5B)6111,636(14,992)(8,061)The biggest driver of FCF are the dividends paid and share buybacks which account for 90% of NI for Apple and 171% for Microsoft (20,807)(48,262)So Both companies do not need cash:Apples FCF=$67,097MMicrosoft FCF=$12,652MThey take advantage of high stock price and low IR They use this cash to pay a part of the dividendsThis includes $12B of dividends paid and $36B of share buybacks

X4.4AR fell which is incredible as sales increased. This is due to an increase in deferred revenues. Apples ICF was 74% driven by the purchase of ST and LT marketable securities.

These 2 lines are neither cash in nor out!

The cash flow of Apple rose by $7.2B whereas microsoft cash flow decrease by $3.1B.

Huge OCF for Apple driven by NI. Less OCF for microsoft but still huge.

54

MICROSOFT2005-20062006-20072007-20082008-20092009-20102010-20112011-20122012-20132013-20142014-2015OCF-13%24%21%-12%26%12%17%-9%12%-10%CAP EX94%43%41%-2%-37%19%-2%85%29%8%FREE CF-19%21%19%-14%39%12%19%-16%9%-13%

MICROSOFT20052006200720082009201020112012201320142015OCF16,60514,40417,79621,61219,03724,07326,99431,62628,83332,23129,080CAP EX (812) (1,578) (2,264) (3,182) (3,119) (1,977) (2,355) (2,305) (4,257) (5,485) (5,944) FREE CF15,79312,82615,53218,43015,91822,09624,63929,32124,57626,74623,136

APPLE 2005-20062006-20072007-20082008-20092009-20102010-20112011-20122012-20132013-20142014-2015OCF-12%146%75%6%83%102%36%6%11%36%CAP EX153%12%48%5%75%112%95%-2%17%18%FREE CF-31%203%80%6%84%101%28%7%10%40%

APPLE 20052006200720082009201020112012201320142015OCF2,5352,2205,4709,59610,15918,59537,52950,85653,66659,71381,266CAP EX-260-657-735-1,091-1,144-2,005-4,260-8,295-8,165-9,571-11,247FREE CF2,2751,5634,7358,5059,01516,59033,26942,56145,50150,14270,019

Historical Cash Flow

81,2662,5353106%29,08016,60575%Huge growth rates in OCF followed by huge growth rates in CAP EX.102%112%101%41%(2%)

Cash is KING. Apple kills the game!36%18%40%(10%)(14%)8%Anticipation for next years opening of 40 new retail stores!

Comparison both companies overall.

Apple huge growth rates in OCF followed by huge growth in CAP EX. Some crazy numbersYear 2010-2011. great year

Microsoft: 2008-2009 badly hit by the crisis so cap ex decreased a lot but not enough to have positive free cash flow55

Cash Flow Trend

2008 crisisIncreasing capital expenditures but it is positively correlated with OCF. This is a good thing.2008 crisisFinancial focus is long term! Because there is an increase in CapEx (new stores, new markets)BUT, the FCF still shows sustainable growth.Microsoft is not as great and stable as the FCF fluctuates more because of constant acquisitions of new companies including a lot of startups.

APPLE VS MICROSOFT: RatiosCompany is Growing overall: Increase in Assets, Cash, NI, Sales. Change in Capital Structure: more Debt !

Earning $9,30 for after paying dividend !

Not for Risk averse investors because of growing debtDont have too much inventory, & receive cash relatively fast.Higher cost? More R&D, Investment: Acquisition

x2 ! AAPL could buy 2 MSFTs

Investors like Microsoft! PE: high potential company; PtB: assets have a lot of value

67% BetterAppleMarch 2016BIG 4

46% BetterMicrosoftMarch 2016BIG 4

CCC is better because DSO has fallen a lot!

DSO & ICD are falling, and APD is also falling, so CCC is Worse.

Small Inventory & IT corporation

Their Dividend is growing

75% Better than MSFTAppleApril 2016BIG 4The 25% worse comes from DEBT!Both DSOs are HUGE: Deferred Revenue

Cash Conversion Cycle Analysis

Buy RMReceive $: CASH INSell ProductPay Suppliers:CASH OUTCCC = - 59 days0Day63291APD = 91DSO = 26ICD = 659 days to invest money !!

Buy RMReceive $:CASH INSell ProductPay Suppliers:CASH OUTCCC = 29 daysAPD = 72DSO = 69ICD = 32Day07210132Have to pay supplier before receiving money Must Borrow (29 days)

Comparative Dupont

Higher EM=Higher debtsNI fell while sales rose

NI rose faster than stockholders equity. Why? Mostly because of share buybacks.

Apple has 2.5 times more sales than Microsoft, but only 1.65 times its assetsIf Apple had not repurchased 325,032 shares for $36B and had not paid $11.6B of dividends, OE would have been $194.1B instead of 119.4B in 2015. And so, ROE would have been 27.5%.

59

Variation Dupont

DOL, DFL, DTL DOL

=Gross Profit/EBIT

DFL

DFL

DTL

=DOL*DFL

DTL

=DOL*DFL

DOL

=Gross Profit/EBIT

EBIT/(EBIT-Interest)EBIT/(EBIT-Interest)1.283.141.041.013.271.29Since DFL is close to 1, DOL is close to DTLDFL=sensitivity of a companys EPS. DFL=1 means insensitivity A high DOL means a high EBIT volatility related to a change in sales

Reuters ratios

Apple is 3 times higher than the industryMicrosofts high capital spending growth rate explained by acquisitions is the only growth rate higher than its industry.

83% of Apples growth rate are higher than the industry, while only 17% for Microsoft

Price to Sales is 66 times higher in the industry than Microsofts Where are they competing? Apple: Electronic equipmentMicrosoft: Business software and services

Reuters ratios

Both companies are more profitable than their industry! 90% of Apples ratio are better and 82% of Microsofts. They have locked in their customers and are industry leaders.

Microsoft has 52 times more LT debt than equity, while Apple has 41.Apples financial strength is 100% worse than its industry.

Reuters ratios

Apple is a top performer in Management effectiveness. All of its ratios are twice as big as the industrys ratio.Microsoft is the worst performer in efficiency. NI/employee is 32 times better in the industry!

Overall, Apple is better compared to its industry than Microsoft is. Out of 41 ratios, 68% are higher than the industry for Apple, while 49% for Microsoft

ROA: 17.3% 6.9%. Fell of 10.4% in 10 yearsROE: 25.5% 15.2%. Fell of 10.3% in 10 yearsROS: 30.8% 13%. Fell of 17.8% in 10 yearsROA: 11.5% 18.4%. Rise of 6.9% in 10 yearsROE: 17.8% 44.7%. Rise of 26.9% in 10 yearsROS: 9.5% 22.8%. Rise of 13.3% in 10 yearsAssets roseSales roseNI not stableAssets roseSales roseNI roseStockholders equity fell due to share buybacks and dividend paid

NI fell by $4.7B

Apple sold 74.8m iPhones in Q1

Analyst forecasted 75.5m. Apple forecasts between $50b and $53b of revenues in Q2 2016While it was $58b in Q2 2015.

Rumors saying iPhones production might be reduced by 30%Symbolic stock price under $100What about stock ?

Microsoft stockMore stable than Apple over the last 3 months.

Stock price: analysis over 5 years

Both AAPL and MSFT have bullish trends above the 100 and 200 SMAs.$45.75$24.05$55.91$132.54From $46 to $104 in 5y : +126% From $25 to $54 in 5y : +116%

QE3 was announced. $40 billion/month purchase by the FedXbox one announcement. NI beats analysts and rose by 19%

AppStore sales rose 50%. App pricing increased.

Disappointing keynote. Announcement of AppleMusic and iOS9 Stock fell 10 percent sales slumped in China and Japan. Stronger U.S. dollar that curbed sales

New Lumia expectations. Ambitious goal of 1 billion Windows 10 active devices by 2018: major turnaround from failed purchase of Nokia.

http://www.wsj.com/articles/apple-says-app-store-sales-rose-50-in-2014-142073814268

Stock price: analysis over 5 years

More globally:

In June 2014, Apple did a 7:1 stock split that boosted the price of its stock. It became more affordable by smaller investors.

In March 2015, Apple also kicked out AT&T and joined MSFT in the prestigious Dow Jones. The stock price rose 2% on the announcement day! AT&T was the logic loser since they are competing in the same sector and Apple is killing them with their innovations. (unlocked phones)

Analysts Opinion

-4,27%

-6,37%

Apple is more attractive to investors !Microsoft is falling fast, so seems to be becoming interesting!

WHY ??70

Analysts Estimate (Morningstar.com)

Dividend yield: div per share market proce per share. For every 100$ invested i the cos stock, the shareholder receive in div

The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company.Apple invests $9.6 in the stock

Cash return = annual $ income / total $ investment 71

Beta Comparison

Yahoo1.35566Reuters0.94

Yahoo1.0436Reuters 0.96

BUSINESS RISKForeign currenciesIntense competition=> possible decrease in operating margin BUT strong business modelAcquisitions, joint ventures, stratregic alliances lead to diversification

FINANCIAL RISKMicrosoft has less cash and more debt in 2015=> risky

MARKET RISKHighly competitive marketWill Apple be able to continue to manage frequent product introductions?Dependance on suppliersCurrency fluctuations

FINANCIAL RISKApple has a lot of cash but has $53B of debt!! Why? -93% of cash is overseas-need to pay dividends and share buybacks

We plan to be very active in the U.S. and international debt markets in 2016 in order to fund our capital return activities Tim Cook

High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities. Yahoo shows higher risk level compared to Reuters (they use different time horizons)

Deferred revenues are great( 4% of Apples revenues and 25% of Microsofts revenues) because the company receives cash before it performs the service! It drives down the Beta because it diminishes the overall risk if the company.

The business risk - the risk that the business generates lower than expected profits or loses money (and yours!).The financial risk - the risk the company has taken on too much debt which it is unable to finance and so goes bust.The valuation risk - the risk we pay too much for a share, minimizing our returns even if the business performs well.

AAPL=Financial risk A lot of cash but the majority of it is overseas so they do not want to bring it back to avoid taxation. As a result, they lack cash in the US where all dividends and buy backs are done. => they have to borrow

72

Correlation coefficient over 1 year Correlation Coefficient S&P 500AppleMicrosoft S&P 5001.00--Apple0.871.00-Microsoft 0.23-0.081.00

AppleMicrosoft Alpha-0.00330.0036Beta1.191.72CC0.660.69

Given the data on the graph, Apple should have a higher beta than microsoft because it moves faster than the market whereas microsoft follows the market trend.

Although they are in the same sector, Microsoft and Apple are not correlated.

When the market does not move, Apple loses $$$

73

Real Risk Free Rate = 0.33% Average return on the market = 8.7%Apple Beta = 1.36RRR= 11.71%Dividend Yield = 1.91%ERR for the year = 0.41%ERR for next year= 12.31%$2.08/$108.99

ERR v. RRR

WAIT UNTIL NEXT YEAR TO BUY APPLE

03/01/2016 -> 13 weeks rate T-bill74

Real Risk Free Rate = 0.33% Average return on the market = 8.7%Microsoft Beta = 1.04RRR=9.03% Dividend Yield = 2.61%ERR for the year = 14.81%ERR for next year= 13.51%

$1.44/$55.23

ERR v. RRR

ERR>RRRBUY NOW! 1.049.03%1.3611.71%

14.81%0.41%BUYSELL

Apple : less buy Microsoft : More buy

75

Lets buy back sharesBuy back as many shares as possible to have more ownershipSales growth is almost always positive but very volatile due to product launches7 for 1 stock split50%First iPod introductionInternet bubble burstFirst iPhone introduction Financial crisis: Apple was not hit20-year History AppleCannibalization: when sales go down they launch and the old product becomes obsolete Death of Steve Jobs=> new leadership

Apple has a lot of cash. So imagine the scale of LTI

76

GamingNokiaBill Gates steps downGamingNokiaBill Gates steps downGamingNokiaBill Gates steps down20 Year History Microsoft

Few Competitors: Sales Skyrocket

Stabilization

Internet Bubble

Financial Crisis

More STI: R&D, Acquisitions

Keeping Cash relatively low

Need to compete! So: INVEST! STI = AcquisitionsWindows 98 is launchedBill Gates no longer CEO Steve BallmerWindows XP& GamingWindows Vista & Office 2007Bill Gates leaves Microsoft to focus on his foundation.MSFT + APPLEOffice for MACD: 25%E: 75%D: 50%E: 50%Financing their company mostly through StockBecause earnings have increased

Exceptional dividend paid: Strong Earnings. Resulted in Change in Cap Structure

1998 & 1999: 2:1 Stock SplitPrice is RisingGamingNokiaBill Gates steps downNo dividend before 2003

STI fluctuations

2004: NI 8B; 2005: Ni 12B. From 2005 onward: change in Capital structure.

MSFTs cash is in STI as they make acquisitions. Whereas Apple keeps it in LTI 77

S&P Assigns 'AA+' Rating to Apple because of Unsecured Notes Offering

Microsoft is assigned AAA by Moodys. Only Exxon and J&J have this privilege!Moodys projects a $7B capital expenditures, $11B of dividend payments, and $18B of free cash flow.Credit rating

Weighted Average Cost of CapitalKM = 8.70%Issued $55.7B Debt in 2015Issued $30.5B Debt in 2015WACC = 5.73%WACC = 9.71%

Issuing more Debt, and lowering cost of debt

Benefitting from Low IRGrowth rate is high (12%)Smaller Debt compared to AAPL

!!Change in Capital Structure!!

AAPLE: lower WACC: more profitable (lower cost than return) & lower than Km: better for investors.MSFT: Higher WACC, but still profitable (growing company)

Low IR: The stock buyback will serve to reduce Apple's WACC, since it can borrow at better than 2% while the cost of equity exceeds 10%. In addition to a low interest rate environment with which to borrow, the interest paid on its debt to bondholders can be counted against its income taxes, increasing its bottom line.

While a negative interest rate environment would mean that high quality corporations such as Apple will be able to borrow cheaper still, a sufficiently negative interest rate will also prompt the company to begin using its stash of cash as it becomes more "expensive" to carry. In fact, by implication, a negative interest rate means that depositors will have to pay to keep their cash warehoused rather than receiving interest income.Europe is already charging a negative interest rate on excess reserves in the financial system, and with $200 billion of cash on hand overseas, negative rates may cause this balance sheet item to become a burden rather than a cushion.

Companies like Apple will need to weigh the costs and benefits to keeping cash stored that loses value to negative rates, or if it should take the tax hit and put that cash to use domestically. Issuing corporate debt at very low yields in order to take equity shares off the market will lower a company's cost of capital and improve its profitability. It is a rational action to undertake, although opponents to the tactic question its legality and ethics, while also citing that it incentivizes too much debt-taking which can lead to insolvency in a downturn.79

Reputation:Damaged by breaking news: decision not to help the government to find terrorists.CompetitionGoogle, MSFT, Sony, Samsung Need R&D: new innovative products.Popularity:Redundant look and feel of the Smartphone.New products arent extremely new.People are questioning the iPhones retail performance).Fashionable luxurious products or useful products ? Chinese market:Devaluation of Yuan (lower margins).Disastrous performance of stock market.Acquisitions and Joint Ventures: NOKIAHaving an adverse effect on their business: Reputation & Sales are falling!CompetitionGoogle Docs VS OfficePopularityTablets: Surface ProMicrosoft 10 (offering for free for users of 7 & 8)PiracySome organizations use a large proportion of pirated software.Important in Emerging markets (China)

AAPL: Reputation: terrorist story with FBI.Popularity: iPhones all look alike & are similar to other brands (e.g. Samsung); New iPad pro doesnt offer anything extremely new./ Neither does the iPhone SE (which is coming at a time when questions are being asked of the iPhones retail performance)Competetion: Apple says that its "ability to compete successfully" is dependent on "its ability to ensure a continuing and timely introduction of innovative new products, services and technologies to the marketplace.

MSFT: Competetion: Threat of Google Docs to Eat Into Office Margins Microsoft Office operating margins were around 64% in 2014. Microsoft released Office 365, a cloud-based software, to compete with Google Apps. Under the cloud-computing model, Microsoft would store Office programs on its own servers and deliver them to customers online. Although this is more cost-effective for its customers, cloud-based Office software will cost Microsoft more when compared to supplying software that is installed on the computers and servers of customers. If Microsoft willingly ends up cannibalizing some of its own business productivity products, it could be due to fears that competition and mobile apps are a serious threat to its business long-term and would pressure margins anyway. Popularity:Microsoft faces headwinds in tablet market Microsoft launched the next version of Windows - Windows 10- in July'15 which aims to improve the user experience on notebooks as well as tablets. While company's initial Surface tablet was hit with negative reviews, Surface Pro 3 gained some traction amongst users. However, as the competitive tablet industry has already established products such as the Apple's iPad and Google's Android tablets, Windows tablets faces strong headwinds as it tries to increase market penetration. To counter this trend Microsoft is offering Windows 10 for free to existing users of Windows 7 & 8 to boost its popularity amongst PCs and tablet. We expect that this trend will dilute Microsoft's pricing and margins.

Piracy Remains an Issue Piracy is an important issue for Microsoft as software piracy in emerging markets is particularly problematic. The problem is grave in China, as some of its biggest organizations (and some segments within government itself) use a large proportion of pirated software. For example, Microsoft estimates that 84% of the Office software and 97% of Windows server software used at China Railway Construction Inc. is pirated. If the Chinese government fails to crackdown on these piracy issues, Microsoft will be left out of a lucrative Chinese market

80

10 Year Profitability

Both Companies have small Inventories

Excess liquidity: (STI 51% TA)Change in Capital Structure: CL rising

Software: low cost, but rising: new products: phone, tablet.High GM: companies are retaining money to service other costs; R&D, interest, taxes

2,43AAPL changing capital structure Ratio usually around 1.Both companies are taking on more debt!

Taking on more debt compared to equity & using the debt to finance a big part of assets.81

Insider Transactions

Breakdown Apple Microsoft % of Shares Held by All Insider and 5% Owners: 0%4% % of Shares Held by Institutional & Mutual Fund Owners: 60%73% % of Float Held by Institutional & Mutual Fund Owners: 60%75% Number of Institutions Holding Shares: 2,440 2,202

MicrosoftHolder % Out Vanguard Group, Inc. (The) 6.14 Capital World Investors 4.52 State Street Corporation 3.87 BlackRock Institutional Trust Company, N.A. 2.61 Price (T.Rowe) Associate Inc. 2.16 FMR, LLC 1.98 Wellington Management Company, LLP 1.93 Bank of New York Mellon Corporation 1.58 JP Morgan Chase & Company 1.41 BlackRock Fund Advisors 1.33

Apple Holder % Out Vanguard Group, Inc. (The) 5.82 State Street Corporation 3.92 FMR, LLC 2.82 BlackRock Institutional Trust Company, N.A. 2.65 BlackRock Fund Advisors 1.30 Bank of New York Mellon Corporation 1.28 Northern Trust Corporation 1.28 JP Morgan Chase and Company 1.11 Invesco Ltd. 1.10 Morgan Stanley 0.93

7 of the major instititutional holders detain 19% of the shares of both companies. APPLE BUY SHORT TOTAL Last 3 months NB of transactions 13 9 22 NB of shares 1,890,703 1,341,969 3,232,672 Last 6 months NB of transactions 25 39 64 NB of shares 2,589,563 2,143,616 4,733,179 Last 12 months NB of transactions 46 94 140 NB of shares 4,657,899 3,634,687 8,292,586

MICROSOFTBUYSHORTTOTAL Last 3 monthsNB of transactions71926NB of shares6,3548,040,0558,046,409Last 6 monthsNB of transactions133548NB of shares10,42834,924,83134,935,259Last 12 monthsNB of transactions3466100NB of shares764,02851,527,06252,291,090

46% of the transactions took place in the second half of the year.

57% of the total shares were traded in the second half.

Most transactions were shorted BUT More shares were bought in total. (56%)48% of the transactions took place in the second half of the year.

67% of the total shares were traded in the second half.

Most transactions were shorted ANDMore shares were shorted (99%)

MICROSOFTBUYSHORTTOTAL Last 3 monthsNB of transactions71926NB of shares6,3548,040,0558,046,409Last 6 monthsNB of transactions133548NB of shares10,42834,924,83134,935,259Last 12 monthsNB of transactions3466100NB of shares764,02851,527,06252,291,090

Carl Icahn forced Tim Cook to change the Capital structure

Laurene Powell Job Trust:2011-> 5.5 million shares of Apple stock = $560 million stake at AppleThat's not even one per cent of the $65 billion his original 11 per cent stake at the company -> When Jobs was ousted from the company in 1985, he sold almost all of his 11% share

http://uk.businessinsider.com/laurene-powell-jobs-inherited-steve-jobs-fortune-2016-2?r=US&IR=T82

The ambushed acquisition road 1997: WebTV networks for $425M. Better TV for customers. The beginning of web videos.

2008: Powerset for $100M: Developed a language search engine that is now found in Bing.

May 2011: acquisition of Skype from Ebay for $8.5B: Huge hit! It is now integrated on the XBOX platform and ditched Windows Messenger. The acquisitions represented 45% of previous years NI. Solid growth. International calls increased 25% since the acquisitions and sales went from $800M to $2B in 2 years

June 2012: Yammer for $1.2B: Microsoft saw an opportunity in enterprise social networking. It has around 4M users and 20% pay for the service.

Sept. 2013: Nokia for $9.4B Acquisition cost 55% of last years net income. Most unsuccessful investment since MSFT wrote off $7.6B in 2015

Sept. 2014: Mojang for $2.5B in cash. Mostly known its iconic Minecraft franchise that has more than 23M loyal users!

Feb. 2016: SwiftKey for $250M in cash. It shares strong vision for personal computing experiences with MSFT and more than 300M users

Apple has fewer acquisitions. Only 2 in 2015 that cost a cheap amount of $20M. The most important Apples acquisition is Beats Music and Beats Electronic for a total amount of $3B in 2014.

Aug. 2007: aQuantive for $6.7B. Worst acquisition ever. MSFT tried to compete with Google in the online advertising business. In 2012, it wrote off $6.2B which represents 93% of its original value.

In 1997, Microsoft invested $150M in Apple preferred stock shares. Redmonds firm had sold its entire stake in Apple by 2003. Today, it would be worth $21.9B!! What a miss. In exchange to this investment, Apple promised to use Internet Explorer at its main web engine.Its up to products whether Sony can survive in the wireless industry.Sony Ericsson has turned to smartphones based on Android to lessen market share losses amid competition from Apple Incs iPhone Bloomberg

Microsoft bought more than 150 companies.83

Research and Development

Apple - Years201520142013R&D expenses ($B)8.16.04.5Growth over years35.0%33.3%

AAPL:3.5% of total revenuesextremely low!!

MSFT - Years201520142013R&D expenses ($B)12.011.410.4Growth over years5.3%9.6%

R&D costs are relatively low ! R&D is necessary for future growth, therefore it should be higher. In addition, MSFT is a monopoly and must fight to keep its position, R&D is the only way to keep away competition. BUT, a huge part of MSFTs R&D is not recorded in the I/S! MSFT buys companies to get their R&D. This only appears in the B/S when goodwill is written off.MSFT:13% of total revenues

MSFT: -Applications and Services Engineering Group, focuses on broad applications and services core technologies in productivity, communication, education, search, and other information categories. Cloud and Enterprise Engineering Group, focuses on development of our cloud infrastructure, server, database, CRM, enterprise resource planning, management, development tools, and other business process applications and services for enterprises. Windows and Devices Engineering Group, focuses on our Windows platform across devices of all types, hardware development of our devices, including Xbox consoles, Surface devices, Lumia phones, non-Lumia phones, Surface Hub, Microsoft Band, and other hardware products and accessories, and associated online marketplaces.

Microsoft Research is one of the worlds largest computer science research organizations, and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science

84

Goodwill

Goodwill is intangible and records:Brand recognitionIntellectual propertyReputation

It is subject to amortization or impairment test to accurately reflect the goodwill asset on the balance sheetFriday the 8th of April

Wait, you said impairment? I dont get it.

Well, Its very easy. Lets take the example of Microsoft!

Another example: in 2013, it acquired Nokia for $9.4B (that includes a high goodwill of $5.4B to buy intellectual property as well) to enter the Phone Hardware Business. But in Q4 2015 it recorded a $7.5B charge for goodwill impairment because the business was not successful. In 2007, it acquired aQuantive for $6B to improve its online service division (OSD). In 2012 the goodwill was determined to be impaired because the OSD suffered from a competitive market and a slow revenue growth. And so, the company recorded a $6.2B charge for goodwill impairment.

Thank you, this is so clear now!

Share Repurchases Retired stocks

Apple20152014Nb of shares O/S beginning of the year (M)5,8666,294Number of shares (M)255287% of the O/S shares acquired4%5%Amount ($M)30,02624,000

Microsoft20152014Nb of shares O/S beginning of the year (M)8,2398,328Number of shares (M)295175% of the O/S shares acquired4%2%Amount ($M)13,2096,409

X1.3X2.1

Apple has entered into accelerated share repurchase arrangements (ASRs) with financial institutions.

March 2014-July 2015: 437M ASR shares repurchase for $39M.

MSFT2008: Repurchase program (expired 2013)September 2013: Board of Director approved a share repurchase program up to $40B.(no expiration date)ALL REPURCHASES WERE MADE USING CASH RESOURCESAAPLRepurchase program: 2012: $10B -> $60B -> $90B3rd quarter 2015: Board of Director increased share repurchase authorization to $140 B. Shares may be repurchased in privetely negociated and/or open market transactions.

Why ?MSFT: Because it has cash but cannot expand since the government stops them since it is already a monopoly. For both: the interest rates are low so borrow as much as you can, as long as you can. For Apple, paying dividends has become too expensive and they want to decrease dividends paid by buying back shares. They issue debt to buy back share. (IR low)Apple is under pressure from Carl Icahn to buy back shares (owns 52.8M shares as of September 2015).

Icahn Carl: Overestimated Apples performance (iPhone 6 did took market share to android, the Apple watch wasnt that big success and the iPad revenues are not boosted and Apple TVHD is almost dead) estimated share worth $203 when at the time it only worth $100 !

Forbes: The hedge fund titan sold 7 million Apple shares in the last quarter, worth about $700 million at recent prices. Thats only 13% of Icahnspriorstake, and he still owns more than $4.4 billion in the iPhone maker. But its the first time Icahn has sold since he built up this large position in Apple in mid-2014.The sale could reflect Icahns need for cashhis publicly-traded Icahn Enterprises LP is down 45% in the last year. But it also could be an admission that he was wrong about Apple.-> suporter of Trump, may be Treasury Secretary

Why pressure :the companys enormous net cash position continues to grow while the companys shares are still dramatically undervalued. With Apples shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback."

AAPL: The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (ASRs) with financial institutions. In exchange for up- front payments, the financial institutions deliver shares of the Companys common stock during the purchase periods of each ASR

In 2012, the Companys Board of Directors authorized a program to repurchase up to $10 billion of the Companys common stock beginning in 2013. The Companys Board of Directors increased the authorization to repurchase the Companys common stock to $60 billion in April 2013, to $90 billion in April 2014 and to $140 billion in April 2015. As of September 26, 2015, $104 billion of the $140 billion had been utilized. The remaining $36 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 26, 2015. The Companys share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

http://www.forbes.com/sites/petercohan/2015/09/08/5-reasons-carl-icahns-bet-on-apple-is-down-by-577-billion/#78e65c832861http://www.macobserver.com/tmo/article/carl-icahn-steps-up-pressure-on-apple-and-tim-cook-to-buy-back-more-shares => Carl Icahn86

INVESTMENT70% of TA = Cash + STI + LTI56% TA: LT Marketable securitiesCash & Investments composed of:

Derivatives & Hedges: to protect themselves from IR risk and Foreign currency risk (a sort of Insurance).Market value of its marketable securities is DECREASINGR&D expense: R&D, licensing of intellectual property, and acquisition of third-party businesses and technology2014 2015 $6.0B $8.1B

CS:57%Cash:6%Mortgage & asset-backed:8%US Treasury securities:16%2014 (July, 31)Acquisitions of Beats Music $2.6B

5.1 million shares of its common stock

Debt to third party creditors:$295MNet Liabilities:$258MIntangible Assets:$636MGoodwill:$2.2BDividend and Interest Income as % of STI + LTI: 2% in 20151.2% in 2014

Net LOSS during years2014: 3822015: 93Unrealized capital LOSS: 0.06%BUT with Dividend yield: net Gain: 1.8%

As of September 2, 2015, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer.

Apple issued 5.1 million shares of its common stock to former equity holders of Beats.

87

51% TA: ST Invesments Biggest Asset67% of Investments = US government and agency securities (ST)7% Corporate notes and bonds (ST)11% Common and preferred stock (LT)

Cash + Investment increase $10B from 2014 to 2015 (85,7 to 96,5)Our short-term investments are primarily to facilitate liquidity and for capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities in order to diversify risk.Of the cash, cash equivalents, and short-term investments at June 30, 2015, $94.4 billion was held by our foreign subsidiaries and would be subject to material repatriation tax effects. The amount of cash, cash equivalents, and short-term investments held by foreign subsidiaries subject to other restrictions on the free flow of funds (primarily currency and other local regulatory) was $2.1 billion. As of June 30, 2015, approximately 79% of the cash equivalents and short-term investments held by our foreign subsidiaries were invested in U.S. government and agency securities, approximately 5% were invested in corporate notes and bonds of U.S. companies, and approximately 5% were invested in U.S. mortgage- and asset-backed securities, all of which are denominated in U.S. dollars.

On April25, 2014, we acquired substantially all of Nokia Corporations (Nokia) Devices and Services Business We acquired Mojang Synergies AB (Mojang), the Swedish video game developer of the Minecraft gaming franchise, in November 2014 (2,5B)

During fiscal years 2015, 2014, and 2013, research and development expense was $12.0 billion, $11.4 billion, and $10.4billion, respectively. These amounts represented 13% of revenue in each of those years. We plan to continue to make significant investments in a broad range of research and development efforts. Microsofts success is based on our ability to create new and compelling products, services, and experiences for our users, to initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the company. Based on our assessment of key technology trends and our broad focus on long-term research and development, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, and devices operating systems and hardware.In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is one of the worlds largest computer science research organizations, and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science, providing us a unique perspective on future technology trends and contributing to our innovation. 51% TA: ST InvestmentsINVESTMENTInvestment:

Cash & ST & LT I: $10B 2014 2015 $85.7B$96.5BUS Gov securities:67%CS & PS:11%Corporate notes and bonds:7%

We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the company.STI: $90BFacilitate liquidity and for capital preservationLiquid investmentDiversified among industries and individual issuers. U.S. dollar-denominated securities, but also include foreign currency-denominated securities in order to diversify risk.

$94.4 billion held by foreign subsidiaries, subject to material repatriation tax effects. R&D = 13% Revenue2015 $12B 2015: 16 Acquisitions.

April25, 2014: Nokia Corporations November 2014: Mojang Synergies AB

2013 to 2014 $995M increase (4%) 2014 to 2015 $9.6B decrease (35%) Goodwill and asset impairment of Nokia ($7.5B) & restructuring expenses ($10B)Dividend and Interest Income as % of STI + LTI: 0.8% in 20151.0% in 2014Unrealized Capital GAIN: 5.9% & w/ div: 6.63%

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Apples lock in process

Few early adopters realized the commitment they were making

Once people pay for the music they want to listen to it on their phone as well.People have to use the AppStoreAt this point, people naturally buy a Mac because they can use the iCloud and have access to all their data. For more convenience, people buy iPad and Apple TV

Genius model

iOS is a new learning system.Individuals and businesses tend to choose Microsoft s software (Pack Office), which they already know how to use.

SALES MIX COMPARISON

Net sales by product ($M)Revenue 2015Sales Mix Revenue 2014Sales MixV$2015-2014V% 2015-2014Sales Mix %iPhone 157,800 67.16% 122,900 61.50% 34,900 28.40%5.66%iPad 21,930 9.33% 29,240 14.63% (7,310) -25.00%-5.30%Mac 33,610 14.31% 34,390 17.21% (780) -2.27%-2.90%iPod 1,200 0.51% 2,210 1.11% (1,010) -45.70%-0.60%Watch 5,200 2.21% - 0.00% 5,200 -2.21%iTunes and iOS 14,170 6.03% 10,400 5.20% 3,770 36.25%0.83%Apple TV 1,040 0.44% 700 0.35% 340 48.57%0.09%Total 234,950 100% 199,840 100% 35,110 17.57%

Net sales by product ($M)Revenue 2015Sales Mix Revenue 2014Sales MixV$2015-2014V% 2015-2014Sales Mix %Devices and Consumer Licensing 14,969 16.00% 19,528 22.49% (4,559) -23.35%-6.49% Hardware: Computing and gaming hardware 10,183 10.88% 9,093 10.47% 1,090 11.99%0.41% Phone hardware 7,524 8.04% 1,982 2.28% 5,542 279.62%5.76% Others 8,825 9.43% 7,014 8.08% 1,811 25.82%1.35%Commercial Licensing 41,039 43.85% 42,085 48.47% (1,046) -2.49%-4.61% Others 10,836 11.58% 7,546 8.69% 3,290 43.60%2.89%Corporate and other 204 0.22% (415) -0.48% 619 149.16%0.70%Total 93,580 100% 86,833 100% 6,747 7.77%

2.52.3

5.2

iPhone is a key product. More than a phone, a way of life with an increase in sales 10 pt higher than the total increase in sales.

This is the future of Apple! These products are attractive. Excellent business plan

iPad: sales decreased the product is losing fame and the tablet market is saturated (Surface 3) But it is still a good way to lock in young customersSwipe trend makes buying apps so easy.

iPod: Apple stopped developing it. Cannibalization by other products.

It looks like the iPhone is eating the sales of other products. You can see why.Nokias acquisition and Lumia phone

Decline in the business and consumer PC market. Expiration of licenses 2014.

The decrease in price of Xbox one from 2014 to 2015 was offset by the release of the Surface Pro 3

Office Consumer revenue declined reflecting the transition of customers to Office 365 Consumer Subscriber growth

Higher commercial cloud revenues due to subscriber growth and higher premium mix of Office 365 CommercialIncrease due to timing of deferred revenues compared to prior years. (Presale to OEMs)

Even if the Mac represents a bigger part in the sales mix than the iPad, Apple sold 231M iPhones, 55M iPads and 21M Macs

Overall, Apples sales rose by 17.57% => great GoodsThe iphone is the product that grows the most (key product)=> keep developing it ! High quality features (quality camera, siri, Be careful w/ future new product development and design and target (iPhone SE). Furthermore keep gaining weight in revenuesIpad: sales decrease by 25% => bad sign for the future of the product. Ipad pro did not have the expected success since the tablet market is saturated. (problem USB key)Ipod sales are troumendousely down by 46%. They should not develop it anymore (no R&D on the product) but keep customers locked in. (attrack young customers=> children) This product is affected by cannibalization. => macs, iphone, ipads etc can now display music as well so the iPod became less useful and attractive. ServicesiTunes, iOS and Apple Tv are the future of Apple as they do not have any production cost. Apple TV does not need cables so easier to install. Its becoming attractive.

Microsoft 90

APPLEOperating Operating Operating Operating V$V%Operating Margin $Margin MixMargin $Margin Mix Mix iPhone 74,127 78.07% 57,991 73.49% 16,137 27.83%4.58%iPad 4,035 4.25% 5,816 7.37% (1,780) -30.61%-3.12%Mac 10,634 11.20% 11,600 14.70% (965) -8.32%-3.50%iPod 275 0.29% 529 0.67% (253) -47.92%-0.38%Watch 1,823 1.92% - 1,823 1.92%iTunes and iOS 3,760 3.96% 2,778 3.52% 982 35.37%0.44%Apple TV 294 0.31% 197 0.25% 97 49.21%0.06%Total 94,950 100.00% 78,910 100.00% 16,040 20.33%0.00%

MICROSOFTOperating Operating Operating Operating V$V%Operating Margin $Margin MixMargin $Margin Mix Mix Devices and Consumer Licensing 13,870 22.91% 17,439 29.18% (3,569) -20.47%-6.27% Hardware: Computing and gaming hardware 1,788 2.95% 892 1.49% 896 100.45%1.46% Phone hardware 701 1.16% 54 0.09% 647 1198.15%1.07% Others 2,022 3.34% 1,393 2.33% 629 45.15%1.01%Commercial Licensing 37,830 62.49% 38,615 64.62% (785) -2.03%-2.14% Others 4,199 6.94% 1,855 3.10% 2,344 126.36%3.83%Corporate and other 132 0.22% (493) -0.83% 625 126.77%1.04%Total 60,542 100% 59,755 100% 787 1.32%0.00%

OPERATING MIX

The iPhone makes up more than 78% of the operating margin of Apple. This is incredible ! But what happens if people do not like the new iPhone SE?The iPhone is clearly the product that drives up the Operating Margin

v

Even though the iWatchs part in Operating Mix increased compared to Macs, lets not forget that Mac still represent 11% of the Operating Margin. Apple makes 2% of its profit out of the iWatch.

It only takes into account 5 months of sales for the iWatch (released in April 2015)

Apple keeps selling iPads even though they do not make a lot of money on it. 1.6

1.3

Easy margin. Not too much effort ($1 applications)

Microsoft makes no profit on phones. So why buy Nokia? Not to make profit but to face Apple and expand their business while spending their extra cash.

Microsoft is profitable in B2B. They sell everything to other companies in order for them to develop their own businesses. (Office, Exchange, Skype, etc.)Its second most profitable piece is related to licenses sold to customers. (Microsoft Office, Windows phone operating system) However, it decreased in the mix because royalties fell as a result of lower sales by the licensees.

Microsoft is changing its business plan focusing more in cloud services and gaming. This leads to a richer mix.20.33%1.32%Overall, Apples profitability increased tremendously compared to Microsofts.

Operating mix 1.9% for watch but(3.12%) ipad, (3.50%) mac

MICROSOFT PRODUCT CONSISTENCYMicrosoft is trying to force its customers to only buy and use Microsoft software. To do that, they sell the phone that matches with its operating system. Today someone who has a mircosft computer but also an iphone is forced to download itunes for example. =>not convenient and encourages people to buy only Apple products

Royalties are paid as a % of revenues of licensees. So if licensees revenues from Microsoft Intellectual Property decrease, royalties fall and revenues for MSFT fall. 91

APPLE 2015 Operating 2014 Operating 2015 v. 2014Margin %Margin %iPhone46.95%47.17%-0.22%iPad18.40%19.94%-1.53%Mac31.65%33.75%-2.11%iPod22.97%23.84%-0.86%Watch35.26%35.26%iTunes and iOS26.53%26.68%-0.15%Apple TV28.47%28.21%0.26%Total 40.40%39.49%0.91%

MICROSOFT2015 Operating 2014 Operating 2015 v. 2014

Margin %Margin %Devices and Consumer Licensing92.66%89.30%3.36% Hardware: Computing and gaming hardware17.56%9.81%7.75% Phone hardware9.32%2.72%6.59% Others22.91%19.86%3.05%Commercial Licensing92.18%91.75%0.43% Others38.75%24.58%14.17%Corporate and other64.71%118.80%-54.09%Total64.70%68.82%-4.12%

These are the products in which the companies want to invest in.

Look at the game between Apple and Microsoft in the phone industy

47% for the iPhone versus 9% for Microsofts phone

Yes but overall Microsoft is doing better than Apple.

46.95%9.32%This is due to Licensing. 40.40%39.49%0.91%

64.70%68.82%-4.12%

92.66%92.18%

However, Apples ROS increased in 2015 whereas Microsofts ROS declined

0.91%-4.12%The 28% increase in sales of the iPhone is due to a 37% incease in units sold maintaining the same operating margin.

Wow ! Thats genius. They did not have to drop their price. Walmart, BestBuy, AT&T did it for them.

The future of Microsoft is gaming. That was their most useful investment. This is because the gaming industry has a new target market with not only geeks playing but a wide range of the adult population.

Licensing which regroups all the microsoft software incliding microsoft office windows server, exchange etc. They are the key dynamic products of the company and Microsoft has been ahead of the game ever since itstarted its business. Even Apple has to conform and people who buy mac need the pack office on their computers so they evolve in a monopoly. 92

Sales impact and GP% impact Operating Margin Mix

The iPad change in OM$ is decreasing due majorly to a decrease of 25% in sales linked to a 19% decrease in units sold. Apple has no interest in selling more since the OM% is falling by 1.5%Computing & Gaming Hardware is mainly impacted by GP% which rose by 8%.In fact, this is due to the decrease in price of the Xbox outweighted by the release of the Surface Pro 3.

They are competitors in some aspects but as you can see here what drives their revenues is particular to each company.As you can see iPhone drives both revenues and largin for apple Licensing drives both revenues and margin for Microsoft Iphone and licensing are two different categories of products.

For Microsoft, the most lucrative categories are definitely licensing, both for D&C and commercial. And Computing and gaming as well as phone are not the most lucrative and represent less than 5% of the total margin whereas they represent 20% of the sales. 93

Altman Z-ScoreAppleMicrosoft$M2015201420152014Current assets89,378 68,531 124,712 114,246 Current Liabilities80,610 63,448 49,858 45,625 Total assets290,479 231,839 176,223 172,384 Total Liabilities171,124 120,292 96,140 82,600 Working capital8,768 5,083 74,854 68,621 EBIT73,248 53,867 19,288 28,417 Retained earnings92,284 87,152 9,096 17,710 Market cap653,541 596,939 353,737 330,300 Sales233,715 182,795 93,580 86,833 Altman Z Score4.415.083.684.07

Distress zoneGrey zoneSafe zone

1.83

Watch out! You may loose your AAA. The Z score decreasesMicrosoft: safe zone no risk of bankruptcyHowever, loss of efficiency: even though sales rise, Total Liabilities rise by 16% and Retained Earnings decreased by 49% Of course = MSFT rated AAA

Apple: safe zone no risk of bankruptcy

But Apple has a better score than Microsoft even if in 2015 it decreased by 0.67 ptEven if sales rose by 28% Total Liabilities rose faster at 42%

How about a triple A for Apple? No, they plan to increase their debt

-0.39-0.67You have a company thats in a highly volatile industry that could have up to $50 billion of debt five or six years down the line, just based on that, it didnt smell like a triple-A. Bloomberg.com

Decrease in RE is due to huge decrease in NI The decrease is NI is due to impairement charges and integration and restructuring expenses You have a company thats in a highly volatile industry that could have up to $50 billion of debt five or six years down the line, just based on that, it didnt smell like a triple-A. Bloomberg Julie&Lonore94

ItemCoefficientB/S value 2015B/S value 2014Bankruptcy 2015Bankruptcy 2014B/S value 2015B/S value 2014Bankruptcy 2015Bankruptcy 2014 Cash And Cash Equivalents 1.00 21,120 13,844 21,120 13,844 5,595 8,669 5,595 8,669 Short Term Investments 0.80 20,481 11,233 16,385 8,986 90,931 77,040 72,745 61,632 Net Receivables 0.60 16,849 17,460 10,109 10,476 17,908 19,544 10,745 11,726 Inventory 0.30 2,349 2,111 705 633 2,902 2,660 871 798 Deferred Income taxes 0.00 5,546 4,318 - - 1,915 1,941 - - Other Current Assets 0.30 23,033 19,565 6,910 5,870 5,461 4,392 1,638 1,318 LT Marketable Securities 0.80 164,065 130,162 131,252 104,130 12,053 14,597 9,642 11,678 Property Plant and Equipment 0.90 22,471 20,624 20,224 18,562 14,731 13,011 13,258 11,710 Goodwill 0.00 5,116 4,616 - - 16,939 20,127 - - Intangible Assets 0.40 3,893 4,142 1,557 1,657 4,835 6,981 1,934 2,792 Other Assets 0.50 5,556 3,764 2,778 1,882 2,953 3,422 1,477 1,711 Total Assets 290,479 231,839 211,040 166,039 176,223 172,384 117,904 112,034 Total Current Liabilities 1.00 80,610 63,448 80,610 63,448 49,858 45,625 49,858 45,625 Net Cash 130,430 102,591 68,046 66,409 Total Non-Current Liabilities 1.00 90,514 56,844 90,514 56,844 46,282 36,975 46,282 36,975 Net liquidation for Bondholders 144%180%147%180% Liquidation Value 39,916 45,747 21,764 29,434 Common Share Outstanding 5,753 6,085 8,177 8,299 Net Liquidation Share $111.36$98.10 6.94 7.52 $43.26$39.80 2.66 3.55

Comparative Bankruptcy Comparative Bankruptcy

Of course, cash is KING

STI are easily convertible into cash LTI are highly liquid (mutual funds etc)

High value of property (Cupertino, California) that can be sold quickly at a small discount.

Goodwill: no one cares! Big hit on Microsoft as they acquired many companies over the years. On the contrary, it does not hurt Apple.

It has high value to the competition but becomes quickly obsolete.

100%100%100%100%

Apple and Microsoft have enough cash to cover non current liabilities so the bondholder will receive 100% of their principal back.

7.67%6.23%

8.92%6.15%

This shows how much $$ shareholders will receive if the companies file for bankruptcy. TO estimate this amount, we set coefficient to determine coefficient for the assets. The first thing the company has to pay is the liabilities that is why the coefficient must be 1Cash and cash equivalents has to be 1 because it is a liquid asset. Then the company can sell its assets and we estimated that STI which are marketable securities for Apple and equity investment for Microsoft cousl be sold at 20% discount. PPE high value Goodwill : do not really care for Apple but important for Microsoft

Apples shareholders willl only get back 6.23% of the their initial investment and microsofts shareholders willreceive 6.15%95

Employees compensation

401(k) retirement investment plan

2014 Employee stock plan: equity grants to employees such as stocks

Performance based award

Share based compensation expenses are $3.8b

Employee stock purchase plan: share can be bought at 85% of their fair value401(k) retirement investment plan

Stock based compensation: estimation of the fair value of the award

Performance based award

Employee stock purchase plan: shares can be bought at 90% of their fair value

LitigationApple VS Microsoft

Apple:

Apple refunded $32.5M to customers whose children made unauthorized in-app purchases.

Lawsuit over IOS8: devouring storage space

May 2014: Samsung and Apple agreed to scale down their international legal war.Withdrawal of patent lawsuits in 9 countries.Had been going on for 3 years: accusing each other of infringing patents in their popular handsets and other mobile devices. In May: total damages Samsung to pay Apple: $119.6 million: was found to have infringed three Apple patents.Microsoft VS Health ProblemsNokia & other handset manufacturers and network operators: defendant in 19 lawsuits Radio emissions from cellular handsets caused their brain tumors and other adverse health effects. Assumed responsibility for these claims. MSFT VS EU commission899M fine for failing to comply to the 2004 decision regarding Microsoft withholding information for rival companiesOVERALLAs of June 30, 2015, MSFT accrued aggregate legal liabilities of $614 million in other current liabilities and $20 million in other long-term liabilities. Estimate: $1.6 billion in aggregate1988 (lasted 4 years): GUI lawsuit (Graphical User Interface) Macintosh VS Windows. Court decision was in favor of Windows.Impact:Apple agreed to make Internet Explorer their default browser. Microsoft agreed to continue developing Microsoft Office and other software for the Mac over the next five years.Both parties entered into a patent cross-licensing agreementApple & FBI facing Terrorism: High-profile legal battle between the FBI and Apple over efforts to gain access to an iPhone that belonged to one of the San Bernardino shooting terrorists. Looking for remaining terrorist threats related to the San Bernardino shooters. FBI accuses Apple of putting its reputation and brand marketing over national security or the lives lost in that shooting, and has essentially painted Apple as unpatriotic. Tim Cook I dont think that something so important to this country should be handled in this way.

Add something about terrorism and Apple

On February 27, 2008 the European Union (EU) competitions commission announced its decision to fine the Microsoft Corporation 899 million (US$1.35 billion), approximately 1/10 of the company's net yearly earnings, for failing to comply with the 2004 antitrust order.The first decision in this antitrust case was given in 2004 citing that Microsoft withheld needed interoperability information from rival software companies which prevented them from making software compatible with Windows. The commission ordered Microsoft to provide this information.

97

Hot news: Foxconn acquires 66% of Sharp for $3.5b Does not sell under its own name

Provides chips for Apple and MicrosoftJapaneseFoxconn's purchase was primarily motivated by Apple's need to prevent a disruption of the supply of LCD screens for its products.Sells LCD screens under its own nameBiggest mobile phone brand in Japan until 20101.3M employees50,000 employeesFoxconn tries to become a more attractive partner for Apple since it uses Sharp screens. It could give Foxconn added leverage in dealings between the two.It will take considerable money and effort to turn Sharp around Analyst says. It is not clear Sharps economics make sense.

Taiwanese

iPhone SE

But then who came up with this crazy idea? Why downgrade a pro