Microsoft (MSFT) Initiation: the Cloud Forms Outperform, $80 Target Price April 2017 RESEARCH ANALYST Michael B

Credit Suisse Equity Research Americas/United States Microsoft (MSFT) Initiation: The Cloud Forms Outperform, $80 Target Price April 2017 RESEARCH ANALYST Michael B. Nemeroff Director, Co-Head of US Software Research Tel: +1 212-325-2052 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should 0 consider this report as only a single factor in making their investment decision. The MSFT Download…

Microsoft MSFT Provider of cloud computing services, desktop and server management tools, productivity software applications, enterprise services, consumer electronics, operating systems, and personal computers Key Competitors: Outperform $80 TP ~$500B Mkt Cap Amazon, Apple, Facebook, Google, IBM, Oracle, SAP

What’s the Call? Our Outperform thesis on MSFT shares is centered on what we view as significant earnings power potential over the next few years, which could be unlocked from (1) strong commercial cloud growth, and (2) higher cloud gross margins over time due to economies of scale. This increased mix shift of cloud revenue (while % margin dilutive in the near term) leads to accelerating gross profit dollar growth, ultimately driving our above-consensus EPS estimates. Given our belief that Microsoft is leveraged to several attractive secular themes (e.g., public cloud momentum, digital business transformations) along with continued cost discipline and current valuation, we view the current risk/reward profile of MSFT shares as attractive.

How Are We Differentiated? We constructed an explicit product-by-product, bottom-up historical analysis and forecast for MSFT. Our proprietary deep-dive revenue/cost build suggests that the company’s Commercial Cloud business remains in the early innings of its growth and leverage cycle, particularly Azure. In addition, we expect sustained gross profit dollar growth from Office 365 Commercial with potential revenue upside from Dynamics 365. 1. Broadly speaking, the enterprise move to the cloud could last for decades, as only a fraction of their computing workloads (ORCL ests 5-6%) are there today. Further, our CS IT survey earlier this year suggested that public cloud momentum will remain strong as a majority of enterprises look to reduce OpEx and gain access to newer technology; 84% indicated they would put new workloads and/or migrate existing workloads to the cloud. 2. We estimate that Azure’s gross margin was nearly breakeven at (2.0)% in FY16, which leads us to conclude that it’s in the very early stages of its life cycle (yet to contribute to GM%). We expect Azure’s margins to steadily improve given our expectations for MSFT to at least maintain, if not gain market share in the IaaS/PaaS markets due to its competitive differentiators (hybrid-cloud platform, enterprise-grade capabilities, and hyperscale infrastructure) and market/product positioning (open ecosystem, interoperability, and enterprise edge). 3. Our proprietary bottom-up model suggests that Office 365 Commercial has been one of the leading drivers of gross profit dollar growth over the past few years; we expect that momentum to continue due to (1) increased penetration (Office 365 remains under-penetrated among total office users at <10%) and (2) further monetization/upsell opportunity through higher-tier subscription plans. 4. MSFT currently trades at a C2018 P/E multiple of 19.2x (or 17.5x excluding SBC), compared with the large-cap software peer group average of 17.4x. Given expectations for stronger revenue/EPS growth vs. peers and an increasing mix of recurring subscriptions, we believe a premium multiple is warranted. Our $80 target price implies a C2018 P/E multiple of 22.6x (or 20.6x excluding SBC). See our MSFT initiation document.

Source: Company data, Thomson Reuters, Credit Suisse estimates.

1 Michael Nemeroff | 212-325-2052 | [email protected] Table of Contents

I. Commercial Cloud + Scale + Mix Shift = Significant Earnings Power II. Build the Intelligent Cloud Platform III. Reinvent Productivity and Business Processes IV. Create More Personal Computing V. Valuation Methodology; Blue Sky/Grey Sky Scenarios VI. CS HOLT® Framework VII. Investment Risks VIII. Proprietary Bottom-Up Build/Financial Model IX. Appendix

“Our strategy is to build best-in-class platforms and productivity services for a mobile-first, cloud-first world. We will realize our mission and strategy by investing in three interconnected and bold ambitions… (1) build the intelligent cloud platform, (2) reinvent productivity and business processes, and (3) create more personal computing.” – Satya Nadella (CEO of Microsoft)

Source: Credit Suisse Equity Research, Microsoft.

2 Michael Nemeroff | 212-325-2052 | [email protected] I. Commercial Cloud + Scale + Mix Shift = Significant Earnings Power The Elevator Pitch on Our Outperform Thesis on MSFT Shares

Our Outperform thesis on MSFT shares is centered on what we view as significant earnings power potential over the next two to three years, which could be unlocked from (1) strong commercial cloud growth and (2) higher cloud gross margins due to economies of scale. This increased mix shift of cloud revenue (while % margin dilutive in the near-term) leads to accelerating gross profit dollar growth, ultimately driving our FY2018 and FY2019 EPS estimates of $3.33 and $3.80, above the current consensus of $3.27 and $3.67, respectively. - Specifically, we model FY2017-19 commercial cloud revenue (Azure, Office 365 Commercial, Dynamics 365) of $14.403B (+54% yr/yr), $20.437B (+42%), and $27.419B (+34%), respectively, resulting in a three-year revenue CAGR of +43%. We believe that MSFT is well-positioned to exceed its previously stated FY2018 commercial cloud annualized revenue run rate target of $20B due to several fundamental themes, which this report touches on. - We forecast commercial cloud gross margin of 60% in FY2019, up significantly from 15% in FY2014, driven by (1) continued strong cloud adoption; (2) a healthy mix of SaaS, PaaS, and IaaS with a higher attach of premium services; and (3) economies of scale driving operational efficiency. - The impact of the two drivers above yields our FY2018 and FY2019 EPS estimates of $3.33 and $3.80, above Street of $3.27 and $3.67, respectively.

Commercial Cloud Growth + Gross Margin Expansion = Significant Earnings Power

$30.0 $27.4B $20.0 70% $4.00 +34% 60% $25.0 $20.4B 55% 60% $16.0 +42% $3.80 $10.4 49% $16.5 44% 44% 50% $20.0 $14.4B $3.60 $3.67 $12.0 +54% $6.4 40% $15.0 $9.3B $11.3 +62% $3.6 30% $5.8B $8.0 $3.33 Revenue Revenue ($B) $10.0 +106% $3.20 $3.27 $1.9 $15.8 $7.0 20% $13.0 15% $0.9

$9.9 $4.0 Earnings Per Share (EPS) $5.0 $6.8 $4.1 10% $0.4 $2.99

$4.4 Commercial CloudGross Margin (%) $2.97

$2.1 Commercial CloudGross Profit ($B) $0.4 $2.5 $0.0 $0.3 $0.5 $0.7 $0.8 $1.0 $1.3 $0.0 0% $2.80 FY14 FY15 FY16 FY17E FY18E FY19E FY14 FY15 FY16 FY17E FY18E FY19E FY17E FY18E FY19E Dynamics 365 Office 365 Commercial Azure CC Gross Profit ($B) CC Gross Margin (%) Credit Suisse EPS Ests Consensus EPS Ests

Source: Thomson Reuters, Credit Suisse estimates, Credit Suisse Equity Research.

3 Michael Nemeroff | 212-325-2052 | [email protected] I. The Cloud Forms—Early Innings of Growth and Potential Leverage Our Proprietary, Explicit, Product Bottom-Up Revenue Build

The Microsoft Cloud Forms and Grows—The Path to $110B+ Revenue by FY2019

$120.0

$100.0 Office Consumer

Office Commercial Business $80.0 Processes Productivity & Productivity Dynamics Office Consumer Svcs & Other LinkedIn $60.0

Server Products & Cloud Svcs

Cloud Revenue ($B) Revenue Intelligent Enterprise Services $40.0 Windows Devices Gaming $20.0

Personal Search

Computing More $0.0 FY14 FY15 FY16 FY17E FY18E FY19E

Leveraging publicly available information (segment results disclosures, SEC filings, presentations, transcripts, analyst day), we constructed an explicit product-by-product bottom-up historical analysis and forecast. Our proprietary revenue/cost build leads us to conclude that Commercial Cloud remains in the early innings of growth AND leverage, which underscores our positive thesis on MSFT shares.

Source: Credit Suisse estimates, Credit Suisse Equity Research.

4 Michael Nemeroff | 212-325-2052 | [email protected] I. What is MSFT’s Commercial Cloud? Commercial Cloud = Azure + Office 365 Commercial + Dynamics 365

Microsoft’s Commercial Cloud

Azure Office 365 Commercial Dynamics 365

Cloud computing service for building, Productivity software applications Customer relationship management managing, deploying, and securing purchased by organizations/enterprises on software products that focus primarily on applications/services through a MSFT- a subscription-based model ($ per user sales, marketing, and customer service enabled global network of data centers per month, annual commitment) operations for businesses of all sizes

Source: Company data, Microsoft, Credit Suisse Equity Research.

5 Michael Nemeroff | 212-325-2052 | [email protected] I. The Cloud Forms—Early Innings of Growth and Potential Leverage Commercial Cloud Is Still Early in Its Life Cycle

FY14 vs. FY19E Revenue Mix FY14 vs. FY19E: Commercial Cloud Forms and Grows

FY2014 FY2014 3% 4% 4% Office Consumer Commercial Cloud 11% Office Commercial (1) Azure (2) Office 365 Commercial Dynamics 24% (3) Dynamics 365 5% Office Consumer Svcs & Other LinkedIn Commericial Cloud Server Products & Cloud Svcs Non-Commercial Cloud Enterprise Services 2% 23% Windows 1% Devices 20% Gaming 97% 5% Search

FY2019E FY2019E

7% 3%

8% 25% 23% 5%

We expect MSFT to be less reliant 16% 2% on Windows- 1% 4% related revenue going forward 75% 5% 24%

Source: Company data, Credit Suisse estimates, Credit Suisse Equity Research.

6 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Azure 101

Microsoft Azure provides a portfolio of cloud computing services (IaaS and PaaS) that encompass networking, identity & access, media & content delivery network, web & mobile, analytics, storage & backup, data, developer services, hybrid integration, management, and commerce. Some examples and use cases include the following. - Virtual Machines, or VMs, are the foundation for cloud computing. Customers can obtain full control over a virtual machine, with the ability to install/run software themselves and configure multiple VMs with different roles to solve complex problems. VMs are essentially your conventional servers. - Cloud Services allow users to easily access and manage VMs; MSFT maintains all VMs with crucial system updates. Customers can decide how many VMs they need and the types of VMs (worker roles vs. web roles) at any given time, providing them with the flexibility to easily scale when needed. - App Services provide tools for developers to create enterprise-grade web and mobile app experiences. This platform enables them to deploy and scale applications in the cloud and integrate them with on-premise resources/SaaS-based applications.

Virtual Machines Cloud Services App Services

Source: Microsoft (https://azure.microsoft.com), Credit Suisse Equity Research.

7 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Azure’s Market Opportunity Is Very Large, in Our View Gartner: Cloud IaaS/PaaS Market Opportunity Significant Addressable Market Opportunity, in Our View

$100 $86.3B Our CS IT survey earlier this year suggested that public cloud momentum will +23% remain strong as a majority of enterprises look to reduce operating expenses and $70.5B $80 +26% $14.8 gain access to newer technology; 84% of large enterprise executives surveyed $56.2B (CIOs, CTOs, IT directors) indicated they would put new workloads and/or +29% $12.6 migrate existing workloads to the cloud, while only 13% indicated no near-term $60 $43.5B +34% $10.6 plans to transition any workloads to the cloud. We believe the move to the cloud $32.5B +39% could last decades, as only a fraction of enterprise computing workloads (ORCL

Revenue Revenue ($B) $40 $8.9 $71.6 ests 5-6%) are in the cloud today. $7.2 $57.9 $5.7 $45.6 $20 $34.6 Specifically, Gartner forecasts the cloud IaaS and PaaS markets, in aggregate, to $25.3 $17.7 grow to $86.3B revenue in 2020E from $32.5B in 2016, which represents a $0 four-year revenue CAGR of +28%, driven by increased adoption as (1) new 2015 2016 2017E 2018E 2019E 2020E features and capabilities are added to address more complex and mission-critical Cloud IaaS Cloud PaaS workloads; (2) organizations are beginning to leverage IaaS platforms to create and develop disruptive cloud-native applications for new digital business IDC: Cloud IaaS/PaaS Market Opportunity initiatives, (3) enterprises continue to modernize their IT structure given the secular shift to digital business transformations; and (4) expectations for price $100 $81.9B cuts by leading vendors, which could foster demand and entice more +22% price-sensitive organizations to make the leap (cost savings is a key driver for $67.2B $80 +23% cloud IaaS adoption currently). $54.4B +26% $35.6 In addition, IDC also forecasts strong cloud IaaS/PaaS growth and expects the $60 $43.1B +39% $28.4 market to approach $81.9B revenue in 2020E from $31.1B in 2016, a four-year $31.1B $22.3 revenue CAGR of +27%. The growth is largely driven by (1) the rapidly growing +46% Revenue Revenue ($B) $40 $17.0 acceptance of public cloud IaaS offerings among enterprises and IT organizations as a viable alternative to traditional, on-premise hardware for IT infrastructure; (2) $12.4 $46.3 $20 $38.8 $8.8 $32.1 an increasing prevalence of hybrid cloud infrastructures among large enterprises $26.1 $18.6 $12.4 (IDC predicts 80% of enterprise IT organizations to be committed to hybrid $0 architectures by 2018); and (3) new service opportunities and workloads 2015 2016 2017E 2018E 2019E 2020E stemming from the adoption and usage of public cloud resources. Cloud IaaS Cloud PaaS

Source: Gartner, IDC, Credit Suisse estimates.

8 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Amazon Web Services (AWS) Microsoft Azure Stacking Up IC Versus the Competition $14.0 $12.0 4.7x Amazon Web Services (AWS) and Azure are the current market leaders in IaaS. From a total revenue perspective, AWS is ~4.7x (CS est.) larger than $10.0 MSFT’s Azure in CY2016, versus >6x in CY15 and >8x in CY14. We believe 6.2x the market is growing and maturing rapidly and has consolidated around the $8.0 leading market vendors. Further, the value proposition of cloud IaaS is no longer $6.0 $12.2 just simple on-demand compute/storage capabilities, but rather a Revenue Revenue ($B) 8.3x comprehensive infrastructure platform that delivers agility, efficiency, scalability, $4.0 $7.9 and security in a highly cost-effective manner. This in turn significantly raises the barriers of entry for other competitors, as evidenced by the exits of several $2.0 $4.6 $0.6 $2.6 competitors (i.e., AT&T and HPE shut down their public cloud IaaS offerings $1.3 while Verizon withdrew significantly from the cloud IaaS market). $0.0 CY14 CY15 CY16

Gartner’s Magic Quadrant for Cloud IaaS—Microsoft Azure

Source: SEC filings, Gartner, Credit Suisse estimates.

9 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Azure Differentiators—(1) Hybrid, (2) Enterprise-Grade, and (3) Hyperscale

(1) Hybrid cloud platform: Azure + Windows Server = a public, private, and hybrid cloud platform that can power today’s modern IT organizations with the same underlying technologies and operational skillsets. This in turn enables enterprises to combine existing datacenters and MSFT’s public cloud offerings into one cohesive and interconnected infrastructure. Azure’s hybrid capabilities provide customers with the flexibility to migrate to the cloud on an as-needed basis with a highly flexible timeline, while offering the same consistency across their applications, data, identity, and infrastructure. (2) Enterprise-grade capabilities: Azure boasts one of the most comprehensive compliance coverage (50 offerings) of any cloud provider, and has been recognized as one of the leading trusted cloud platforms for U.S. government institutions (met the Federal Risk and Authorization Management Program, or FedRAMP, High Baseline requirements across 18 Azure offerings). In addition, Azure is one of the few public clouds that provides advanced analytics, cognitive APIs, bots, Blockchain-as-a-Service (BaaS), and machine learning capabilities for developers and data scientists. (3) Hyperscale infrastructure: Azure is generally available in 34 regions around the world (with four additional regions planned), more than any other cloud provider. Data centers/geographic expansion remains a high priority given Azure’s focus on achieving the best performance and support regardless of location. We believe there are more favorable economies of scale for hyperscale cloud providers due to (1) overall demand aggregation vs. supply (reduces seasonality and random variability of demand) and (2) significant cost synergies (lower electricity, overhead, and labor costs on a per unit basis).

Hybrid Cloud Platform Compliance Coverage

Source: “Microsoft IT Cloud Computing Strategies Continue to Evolve Business” Case Study, Microsoft Azure (https://azure.microsoft.com), IDC, Credit Suisse Equity Research.

10 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Azure—A Global Footprint and Hyperscale Infrastructure

Source: Microsoft (https://azure.microsoft.com), Credit Suisse.

11 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Market Consolidating Around Leading Vendors

We believe Azure (currently #2) will continue to at least maintain its market share in the IaaS and PaaS market, due to its competitive differentiators as well as the following broader themes: Gartner’s 2016 Magic Quadrant for Enterprise (1) Open Mindset: Ever since Satya’s appointment as CEO, there has been a Application Platform-as-a-Service (PaaS) clear emphasis on becoming more open and less reliant on the Windows franchise (e.g., first MSFT CEO to use a Mac during its Annual Build Developer Conference). Management’s new vision led to less alienation of potential customers (e.g., better Azure support for open-source technologies like Linux, which resulted in roughly one-third of total VMs now running on open-source OS). (2) Interoperability: Azure contains leading IaaS and PaaS offerings that can seamlessly extend and interoperate with on-premise MSFT-enabled infrastructures (Active Directory, Hyper-V, System Center, and Windows Server), development tools (Team Foundation Server and Visual Studio), middleware and applications, such as its own SaaS offerings (Dynamics, Office 365). (3) Enterprise Awareness Edge: We believe MSFT’s relationship or awareness with nearly every enterprise in the world and its reputation for delivering good products/service will give the company an edge as organizations implement more complete/advanced digital business transformation strategies. While the Azure network is not yet fully at scale (some MSPs report challenges in working with Azure), MSFT has been actively recruiting professional services partners to expand the Azure ecosystem, which we believe would reduce the time-to-delivery and further enhance the value proposition. (4) Good Enough: Over the past several years, MSFT has introduced multiple new features/services and committed to maintain basic cloud IaaS pricing that’s comparable to AWS for low-level workloads. For the more differentiated sets of features as customers move up the stack, there is less price competitiveness compared with simply compute/storage capabilities. While Azure is not as mature as AWS, many enterprises today consider it as good enough and typically base their vendor decision factors other than just simply pricing.

Source: Company data, Gartner, IDC, Microsoft (https://azure.microsoft.com), Credit Suisse Equity Research.

12 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Key Debate—What Is Azure’s Gross Margin Now and Where Can It Go? Part 1

Azure’s current gross margin profile and potential leverage has been a key topic of discussion among investors as its share of the market has grown. Leveraging our proprietary bottom-up model build, we estimate that Azure’s gross margin was nearly breakeven at (2.0)% in FY16, which supports our thesis that Azure remains in the very early innings of its life cycle. We expect Azure’s margins to materially improve as the business scales, generating margins that are similar to, or higher, than those of AWS. Our Methodology to Triangulate Azure’s Historical Gross Profits (Losses): Utilizing previous MSFT’s disclosures and leveraging our proprietary bottom-up build, we estimate an Enterprise Services (ES) historical gross margin range of 30-33%. We believe the consensus could be mismodeling the gross margins for ES (some estimates are as low as 20-25%, thereby overstating the implied gross profits for Azure). At a GM of 30-33% for ES and assuming Server Product Licensing gross margin of 94-95%, this yields to our FY14 to FY16 Azure gross profits (losses) estimates of ($934)M, ($394)M, and ($37)M, yielding gross margins of (239.4)%, (44.6)%, and (2.0)%, respectively. Our fundamental analysis indicates that Azure’s gross profits remain subscale, and we expect material margin expansion as (1) utilization and (2) mix of premium services increase over the next few years.

Product Segment Mapping Credit Suisse Bridge to Implied Enterprise Services GM%

Commercial Other $5,000

Azure $4,000 Commercial Cloud = Office 365 Commercial $1,683 33.2% Dynamics 365 $3,000 Enterprise Services $4,199 $2,000 38.8%

Intelligent Cloud $1,442 $2,516 Gross Gross Profit ($M) / GM% $1,000 $1,855 30.4% 43.6% Azure 24.6% $413 14.7% Server Product Licensing $0 Enterprise Services FY14 FY14 FY14 Enterprise FY15 FY15 FY15 Enterprise Commercial Commercial Services Commercial Commercial Services Other Cloud (Implied) Other Cloud (Implied) Source: Company data, Thomson Reuters, Credit Suisse estimates.

13 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Key Debate—What Is Azure’s Gross Margin Now and Where Can It Go? Part 2

Our Methodology to Triangulate Azure’s Historical Gross Profits (Losses), Continued: We believe a reason why Azure could potentially be operating at close to breakeven from a cost of revenue perspective (and negative from an earnings perspective) despite generating $1.872B of revenue (CS est.) in FY16 stems from the company’s significant buildout of data centers internationally and aspirations to become one of the largest hyperscale cloud providers, as well as continued investments in security, maintenance, and maximizing uptime. We forecast margin expansion in Azure for the next several years, at least, as customer adoption and % utilization catches up to front-end loaded investments, as well as increased efficiencies from both hardware (will begin using ARM-based servers for Azure) and software (constant system updates). In addition, we note that if we assume FY16 Azure’s gross margin of (2.0)%, it would imply Office 365 Commercial/Dynamics 365 gross margin of 55.9%. As such, we believe there remains (1) a significant opportunity for material margin expansion in Azure as upfront data centers investments and costs begin to generate more meaningful ROI and (2) continued gross profit dollars growth in Office 365 Commercial/Dynamics 365 as these products continue to scale (see slides 18-21) and reach steady-state gross margin of ~70%, in our view.

Credit Suisse Bridge to Azure Gross Margin % Implied GM% for Office 365 Commercial/Dynamics 365

$20,000 $1,848 ($37) Revenue / % of Commercial Cloud Revenue Gross Profit / Gross Margin % 33% (2)% $10,000 $16,000 $8,000 $12,000 $18,502 Azure still in $6,000 $7,470 80% 74% $16,690 early innings $8,000 95% $9,342 of its life cycle $4,000

$4,000 $4,139 $4,176 $2,000 Revenue / Gross Revenue / Gross Profit ($M) 44% $1,872 56% ($37)

Gross Profit Gross ($M) / Margin Gross % 20% (2)% $0 $0 FY16 Intelligent FY16 Server FY16 Enterprise FY16 Azure FY16 Commercial FY16 Azure FY16 O365 Commercial Cloud Product Licensing Services Cloud + Dynamics 365

Source: Credit Suisse estimates.

14 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform Key Debate—What Is Azure’s Gross Margin Now and Where Can It Go? Part 3

We forecast FY2017-19 Azure revenue of $3.638B (+94% yr/yr), $6.408B (+76%), and $10.388B (+62%), respectively, resulting in a three-year revenue CAGR of +77%. Further, we conservatively model Azure gross margin expansion to 47% in FY19E from (2)% in FY16 given a healthy mix of PaaS/IaaS, which results in accelerating gross profit dollar growth and suggests more room for leverage beyond FY19. We believe that public cloud momentum will remain strong as large enterprises look to reduce expenses and gain access to newer technology, while putting most new workloads and migrating some existing ones to the cloud (see link for our 2017 Software Outlook). Given MSFT’s (1) significant/entrenched install base, (2) existing relationships with large enterprises, (3) competitive differentiators (hybrid cloud strategy with enterprise-grade capabilities and a hyperscale infrastructure), (4) a rapidly expanding ecosystem of partners and third-party vendors, and (5) continued innovation/increased operational efficiencies on both hardware and software, we believe Azure will continue to see strong sustained growth while generating incremental leverage. Lastly, we look toward AWS as a read-through for MSFT as to where margins could potentially go. In CY16, AWS generated revenue of $12.219B (+57% yr/yr from $7.880B the prior year) with an operating margin of ~30% (up ~+600bps yr/yr from ~24% in 2015). We believe Azure could achieve comparable margins once it reaches a similar scale, at least (we forecast revenue of $10.4B and gross margin of only 47% in FY19E).

AWS Revenue and OPERATING Margin Azure Revenue and GROSS Margin Expansion

$15.0 36% $12.0 100% 30% 47% 28% 50% 30% 9% $12.0 (2)% $10.4 $12.2 $9.0 0% 24% (45)% 24% $9.0 +77% CAGR (50)% 18% $6.0 (100)% 14% $7.9 $6.4 $6.0 (150)%

12% AWS AWS Revenue ($B)

$4.6 Azure Revenue ($B) $3.0 $3.6 (200)% $3.0 (239)% Azure Gross Margin (%) 6% AWS Operating Margin (%) $1.9 (250)% $0.4 $0.9 $0.0 0% $0.0 (300)% CY14 CY15 CY16 FY14 FY15 FY16 FY17E FY18E FY19E AWS Revenue AWS Operating Margin Azure Revenue ($B) Azure Gross Margin (%) Source: Company data, Amazon, Credit Suisse estimates.

15 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform IaaS vs. PaaS vs. SaaS—What’s the End Game?

MSFT is one of the few software vendors that has a strong portfolio and presence in all three markets: IaaS, PaaS, and SaaS. - IaaS vs. PaaS. vs. SaaS: The distinction lies within the separation of responsibilities and what the customer prefers to manage (from managing the operating system/middleware in an IaaS environment to just simply handling the data/applications in a PaaS environment). MSFT’s Azure business was initially a platform-as-a-service (PaaS) offering, but with the launch of Azure Infrastructure Services (which include Azure Virtual Machines and Azure Virtual Network) in April 2013, MSFT officially entered the cloud infrastructure-as-a-service (IaaS) market. - Will IaaS Be Commoditized? An investment concern is the fear of IaaS commoditization. However, we believe many customers looking to adopt cloud IaaS offerings base their decisions on the provider’s entire data center ecosystem, including IT service management capabilities, new forms of automation, analytics and insights, which we believe resemble more of a software market rather than traditional IT services. - New Azure Stack: Microsoft’s new Azure Stack offering would effectively allow customers to bring full Azure cloud features/functionality onto their own on-premise data centers, which we view as a further affirmation of MSFT’s hybrid cloud strategy. Its pricing model will be similar to that of Azure but will be lower given that the customers own/manage their own hardware/servers in their facilities.

On-Premise IaaS (Host) PaaS (Build) SaaS (Consume)

Applications Applications Applications Applications

Data Data Data Data

Runtime Runtime manage You Runtime Runtime

Middleware Middleware Middleware Middleware You manage You O/S O/S O/S O/S

Virtualization Virtualization Virtualization Virtualization

You manage You MSFT manages MSFT Servers Servers Servers Servers

Storage Storage manages MSFT Storage Storage

Networking manages MSFT Networking Networking Networking

Source: Microsoft (https://blogs.technet.microsoft.com), Gartner, IDC, Credit Suisse Equity Research.

16 Michael Nemeroff | 212-325-2052 | [email protected] II. Build the Intelligent Cloud Platform MSFT’s Strong Product Portfolio in All Three Markets: IaaS, PaaS, and SaaS

Moving Up The Stack/Increased Mix of Premium Services = Higher Gross Margin %

Software- as-a-

Service Higher Gross Margin % Margin Gross Higher

Platform-as-a-Service More Pricing Power = = Power Pricing More

Infrastructure-as-a-Service "Moving up the Stack" = Stack" the up "Moving

Source: Microsoft (https://blogs.technet.microsoft.com), Credit Suisse Equity Research.

17 Michael Nemeroff | 212-325-2052 | [email protected] III. Reinvent Business Productivity and Business Processes Office 365 Commercial—We Expect Sustained Gross Profit Dollar Growth

Our bottom-up revenue model suggests that Office 365 Commercial has been one of the leading drivers of gross profit dollar growth over the past few years, and we expect continued momentum driven by (1) increased penetration and (2) further monetization. Given our estimates for Azure gross margins over the past few years (see slides 13-15 for our bridge), our model indicates that Office 365 Commercial gross profit has been the leading driver of gross profit dollar growth. Specifically, we estimate cumulative Office 365 Commercial gross profit dollars of ~$7.9B for the period FY14-16, which compares with Commercial Cloud gross profit dollars of ~$7.1B. We expect continued gross profit dollar growth in Office 365 Commercial over the next few years, at least, driven by (1) increased penetration (we believe Office 365 remains under-penetrated among total office users at <10%) and (2) further monetization/upsell opportunity through higher-tier subscription plans (e.g., E3 & E5). Specifically, we forecast FY2017-19E Office 365 Commercial revenue of $9.929B (+45.7% yr/yr), $12.984B (+30.8%), and $15.760B (+21.4%), which result in a three-year revenue CAGR of +32%. We model continued Office 365 gross margin expansion to 68% in FY19E, partially offset by our expectations for some value-pricing and storage-related workloads. That said, we believe the introduction of a higher pricing-tier could provide further upside to our current estimates.

Office 365 Commercial Revenue and Gross Margin % Office 365 Commercial Gross Profit $ vs. Commercial Cloud

$18.0 75% $20.0 67.3% 68.2% $16.0 62.9% 59.5% 58.9% 56.7% $15.8 63% Office 365 Commercial has been a $16.0 $14.0 leading driver of gross profit dollar $16.5 growth, and we expect that to continue $12.0 $13.0 50% for the next few years (though it will be $10.0 $12.0 less as a % of total Commercial Cloud) $9.9 38% $11.3 $8.0 $10.7 $8.0 65% $6.0 $6.8 25% $8.7 $7.0 $4.0 Gross Profit Dollars ($B) $6.2 78% $4.4 13% $4.0 Office Office 365 Commercial Revenue ($B) $2.0 $4.0 $4.1 89% $2.1 Office 365 Commercial Gross Margin (%) $1.2 $2.6 $2.5 $0.0 0% $0.4 FY14 FY15 FY16 FY17E FY18E FY19E $0.0 Office 365 Commercial Revenue Office 365 Commercial Gross Margin % FY14 FY15 FY16 FY17E FY18E FY19E Office 365 Commercial Gross Profit $ Total Commercial Cloud Gross Profit $ Source: Credit Suisse estimates.

18 Michael Nemeroff | 212-325-2052 | [email protected] III. Reinvent Business Productivity and Business Processes Office 365—We Estimate <10% Penetrated Among Total Office Users

Leveraging our product-by-product build and previous disclosures, we estimate a current Office 365 user base (Commercial + Consumer) of ~118M. Our analysis suggests that Office 365 is <10% penetrated among total office users (>1.2B) worldwide. We believe adoption of Office 365 by organizations and enterprises primarily stem from the suite’s (1) always-up-to-date services, (2) ability to deploy on any platform and device (Windows, Linux, macOS, iOS, Android), and (3) rich features and apps (recently introduced MSFT Teams, a chat-based workspace that competes in the enterprise collaboration software market). We expect continued momentum over the next several years, at least, as there’s still a significant number of enterprises and businesses that have yet to convert to Office 365. In addition, we believe MSFT’s ongoing Office 365 conversion could target the large non-licensed/pirated user base; for instance, ADSK ests ~70% of its total user base are pirates. As Office 365’s features and security continue to surpass outdated, legacy on-premise Office products, this could entice current non-paying users (both commercial and consumer) to subscribe to a monthly Office 365 plan given the low cash outlay initially.

CS Office 365 Subscriber Build (Commercial + Consumer) CS Ests <10% Penetrated Among Total Office Users

200 Office 365 Users = 9% 160 CS ests ~118M (~118M) Office 365 users in F2Q17 120

80 >1.2B Total Office Users 40 Non-Office 365 Users = 91%

0 (>1.1B)

# of Total Office 365 Users (in millions) (in Users 365 Office Total of #

Jun Jun '14 Jun '15 Jun '16

Mar'14 Mar'15 Mar'16

Sep'13 Sep'14 Sep'15 Sep'16

Dec '13 Dec '14 Dec '15 Dec '16

Jun Jun '17E Jun '18E Jun '19E

Mar'17E Mar'18E Mar'19E

Sep'17E Sep'18E

Dec Dec '18E Dec '17E Office 365 Commercial Monthly Active Users (MAUs) Office 365 Consumer Subscribers Source: Company data, Credit Suisse estimates.

19 Michael Nemeroff | 212-325-2052 | [email protected] III. Reinvent Business Productivity and Business Processes Office 365 Commercial—We Expect an Increase in CLTV CS Office 365 Commercial Bottom-Up Build In our view, MSFT is still in the early innings of potential upsell opportunity/monetization for its Office 365 commercial products as more 160 $10 enterprises adopt higher tiers (i.e., E3 and E5). We expect an increase in $9.59 $9.77 customer lifetime value (CLTV) given the natural uplift from the current 365 $9.42 143.9 commercial conversion cycle as well as ARPU expansion. $9.02 $8.95 120 $9 MSFT saw an increase in premium services over the past 12-24 months, mostly driven 125.1 from an increased user mix to E3 from E1. Presently, security remains very top of the mind for enterprises (CS IT survey indicates spending on security software to be a top 100.5 priority) and is typically easier to deploy firm-wide. Other upsell opportunities include 80 $8 analytics and voice capabilities, though based on our due diligence, we note the sales 75.1 cycles for these could take longer vs. its advanced security offerings. 40 51.8 $7 Lastly, we note that E5 will likely not be MSFT’s highest pricing-tier as they could potentially introduce newer/more advanced features (e.g., artificial intelligence) in the

future that could extend pricing above the $35 per user per month price point. Office Office 365 Commercial MAUs (in millions) 0 $6 Office 365 Commercial Monthly ARPU ($) FY15 FY16 FY17E FY18E FY19E Office 365 Commercial MAUs Natural Uplift in CLTV from Office 365 Conversion Office 365 Commercial Monthly ARPU

E1 vs. E3 vs. E5 Pricing Plans

Source: Company data, Microsoft, GLG, Credit Suisse estimates.

20 Michael Nemeroff | 212-325-2052 | [email protected] III. Reinvent Business Productivity and Business Processes LinkedIn Could Add More Fuel to Dynamics = Potential Upside

According to our estimates, Dynamics 365 is the smallest piece of Total Commercial Cloud (CS currently ests <10% of total revenue), but we believe the acquisition of LinkedIn could present incremental revenue opportunities and synergies. We’re currently modelling FY19 Dynamics 365 revenue of $1.271B, which represents a FY16-FY19 CAGR of +25%, based on our expectations for 15.7M paid, monthly Dynamics seats (~+2M on average per year from ~9.7M in FY16) and continued modest ARPU uplift driven by a higher mix of premium apps/services. While we believe Azure and Office 365 Commercial could be the greatest drivers of absolute gross profit dollar growth in the near to medium term, Dynamics 365 could provide further upside to our estimates, particularly given MSFT’s recent acquisition of LinkedIn. In addition, we note that MSFT has recently added a series of updates to its Sales Navigator product, a subscription-based service that lets sales representatives leverage LinkedIn for customer leads i.e., social selling. We believe LinkedIn’s database of business users (>465M) and the connective links between them could have valuable data to use inside Sales Force Automation products, such as those from Salesforce.com and Microsoft Dynamics. We believe MSFT is well-positioned to leverage Sales Navigator’s success on multiple CRM platforms, thereby redefining social selling by enhancing Dynamics 365 with LinkedIn capabilities.

Dynamics 365 Revenue vs. Dynamics On-Premises LinkedIn Could Present Incremental Opportunities = Potential Upside to Our Estimates $3.0

$2.5 Reinventing… $2.0 $1.3 $1.0 (1) Selling $0.5 $0.7 $0.8 $0.3 (2) Marketing $1.5 (3) Talent Management

Revenue Revenue ($B) $1.0 Growth Opportunity $1.6 $1.6 $1.5 $1.5 $1.4 $1.4 LinkedIn MAU $0.5 LinkedIn Sales Navigator Dynamics $0.0 FY14 FY15 FY16 FY17E FY18E FY19E Dynamics (On-Premises) Dynamics 365 Source: Company data, https://business.linkedin.com/sales-solutions/blog/linkedin-sales-navigator/2017/03/taking-sales-navigator-to-a-new-level, Credit Suisse estimates.

21 Michael Nemeroff | 212-325-2052 | [email protected] IV. Create More Personal Computing Windows-as-a-Service

Windows 10 introduces a new process for customers to build, deploy, and service Windows operating systems, particularly given today’s rapidly/constantly changing world where new security, management, and deployment capabilities are needed to address challenges. (1) Building: Prior to Windows 10, MSFT released a new version of Windows every few years. This traditional deployment schedule prevented many new features from rolling out in a timely manner and imposed a training burden on users as feature revisions were often very material (e.g., user interface). (2) Deploying: The deployment of Windows 10 is also much simpler compared to previous versions of Windows. For many years, one of the challenges for organizations when deploying a new version of Windows is compatibility testing (applications and devices). Windows 10 is compatible with most hardware and software for users running on Windows 7 or later, which further simplify the app compatibility testing process. (3) Servicing: Traditional Windows servicing included numerous release types such as major revisions, service packs, and monthly updates. With Windows 10, there are now only two release types: (1) feature updates that add new functionality two to three times per year and (2) a cumulative monthly update containing all the security and non-security fixes, which further simplifies the patching process and minimizes platform fragmentation issues.

CS IT Survey: When do You Plan to Upgrade Your Quality Updates: One Cumulative Monthly Update Organization to Microsoft Windows 10? (vs. Many Updates Each Month Pre-Windows 10)

<12 months 36%

>12 months, but within 24 months 30%

Already have 15%

To Be Determind, but on the priority to-do list 11%

No plans yet - Not a priority in the NT 8%

0% 10% 20% 30% 40% % Response Source: Company data, https://technet.microsoft.com/itpro/windows/update/waas-overview, Credit Suisse estimates, GLG.

22 Michael Nemeroff | 212-325-2052 | [email protected] IV. Create More Personal Computing Personal Computer (PC) Shipments Data Trends

The Windows franchise’s material exposure to the PC market remains an investment concern as it is a big driver of EPS. IDC currently forecasts PC shipments to stabilize and to decline only modestly (2016-21 CAGR of down -0.6%, well above prior 2012-16 CAGR of down -7.1%). However, steeper-than-expected PC declines could have an adverse impact on results and earnings as the Windows product is a highly profitable product segment (we estimate ~40% of MSFT’s FY16 operating profits, assuming a 60-70% operating margin). However, we estimate that MSFT will be less reliant on Windows revenue over time as commercial cloud revenue and operating profits grow faster. We believe the company is well-positioned to achieve and/or exceed management’s $20B commercial cloud annualized revenue run rate in FY18 given the secular shift for digital business transformations of today’s enterprises and our view that its Azure, Office 365, and Dynamics remain in the early innings of penetration and monetization, which should drive sustained strong gross profit dollar growth for the next several years, at least.

IDC Expects PC Shipments to Stabilize Thru 2021 MSFT Will Be Less Reliant on Windows, In Our View

400.0 15% 100% 50% IDC expects 48% 350.0 PC shipments 10% 300.0 to stabilize 80% 45% 5% 250.0 42% $66.7 60% $74.8 $74.6 $78.9 200.0 0% $86.6 $93.9 41% 40% 40% 150.0

-5% Change % Yr/Yr 40% 100.0

PC Shipments PCShipments (millions) 36% % of % Total Revenue ($B) -10% of % MSFT's TotalEBIT 50.0 35% 20% 33% 0.0 -15% $20.4

$18.3 $17.4 $17.6 $17.6 $17.6

2013 2008 2009 2010 2011 2012 2014 2015 2016

2007 0% 30%

2018E 2019E 2020E 2021E 2017E FY14 FY15 FY16 FY17E FY18E FY19E PC Shipments % change yr/yr Windows Non-Windows % of MSFT's EBIT

Source: Company data, IDC, Credit Suisse estimates.

23 Michael Nemeroff | 212-325-2052 | [email protected] Competitive Landscape Highly Competitive Market—Applications, Platforms, Devices, and Other

MSFT faces intense competition in the technology sector across all of its products, including applications, platforms, devices, and other. Competition is fierce given MSFT’s breadth of offerings & services with competitors ranging in size from diversified global companies with significant research and development resources to smaller/specialized firms whose narrower product lines may lead to a more effective deployment of technical, marketing, and financial resources. Key competitors include (but are not limited to) Adobe Systems, Amazon, Apple, BMC, CA Technologies, Cisco Systems, Facebook, Google, Hewlett-Packard, IBM, Nintendo, Oracle, SAP, Salesforce.com, Sony, and VMware.

Applications Ecosystems / Platforms

Devices Search / Communications / Other

Source: Company data, Credit Suisse Equity Research.

24 Michael Nemeroff | 212-325-2052 | [email protected] Guidance & Estimates

Quarterly Estimates vs. Consensus (F3Q17) Quarterly Estimates vs. Consensus (F4Q17)

Quarterly Estimates and Guidance Variance Analysis Quarterly Estimates and Guidance Variance Analysis Guidance Consensus Credit Suisse Consensus Credit Suisse Mar '17E Mar '17E Mar '17E Amounts in US$millions, except per Jun '17E Jun '17E Productivity and Business Processes 7,650-7,850 7,780 7,794 Productivity and Business Processes 8,326 8,349 Intelligent Cloud 6,450-6,650 6,592 6,614 Intelligent Cloud 7,214 7,281 More Personal Computing 9,050-9,350 9,221 9,222 More Personal Computing 8,918 8,861 Total Revenue $23,150-23,850 $ 23,623 $ 23,630 Total Revenue $ 24,516 $ 24,492 Total Cost of Revenue 8,350-8,450 8,533 8,372 Total Cost of Revenue 8,870 8,628 Gross Profit 15,089 15,257 Gross Profit 15,647 15,864 • Gross Margin % 63.5-65.0% 63.9% 64.6% • Gross Margin % 63.8% 64.8%

Total Operating Expenses 8,500-8,600 8,402 8,554 Total Operating Expenses 9,100 9,307 Operating Income 6,687 6,704 Operating Income 6,546 6,557 • Operating Margin % 26.3-29.4% 28.3% 28.4% • Operating Margin % 26.7% 26.8%

Total Other (expense) income, net 150 159 150 Total Other (expense) income, net 39 150 Pro forma pretax income 6,846 6,854 Pro forma pretax income 6,585 6,707

Effective tax rate 20.6% 20.0% Effective tax rate 20.6% 20.0% Pro forma Net Income 5,437 5,483 Pro forma Net Income 5,229 5,365

Pro Forma EPS Fully Diluted $0.70 $0.70 Pro Forma EPS Fully Diluted $0.68 $0.69 Shares Outstanding (fully diluted) 7,816 7,784 Shares Outstanding (fully diluted) 7,674 7,738

Total Unearned Revenue - 35,752 Total Unearned Revenue - 41,250 Cash Flow from Operations 9,887 11,130 Cash Flow from Operations 8,962 11,577 Capital Expenditures 2,285 2,500 Capital Expenditures 2,481 2,500 Free cash flow 7,602 8,630 Free cash flow 6,480 9,077

Source: Thomson Reuters, Credit Suisse estimates.

25 Michael Nemeroff | 212-325-2052 | [email protected] Guidance & Estimates

Annual Estimates vs. Consensus (F2017) Annual Estimates vs. Consensus (F2018)

Annual Estimates and Guidance Variance Analysis Annual Estimates and Guidance Variance Analysis Guidance Consensus Credit Suisse Guidance Consensus Credit Suisse Amounts in US$millions, except per F2017E F2017E F2017E Amounts in US$millions, except per F2018E F2018E F2018E Productivity and Business Processes 30,174 30,183 Productivity and Business Processes 34,262 34,294 Intelligent Cloud 27,052 27,139 Intelligent Cloud 29,629 29,972 More Personal Computing 39,315 39,200 More Personal Computing 39,559 39,862 Total Revenue $ 96,605 $ 96,521 Total Revenue $ 104,142 $ 104,128 Total Cost of Revenue 35,908 34,745 Total Cost of Revenue 38,158 37,909 Gross Profit 60,697 61,776 Gross Profit 65,984 66,219 • Gross Margin % 62.8% 64.0% • Gross Margin % 63.4% 63.6%

Total Operating Expenses 33,100-33,300 32,147 33,257 Total Operating Expenses 34,522 34,881 Operating Income 28,551 28,519 Operating Income 31,462 31,338 • Operating Margin % 29.6% 29.5% • Operating Margin % 30.2% 30.1%

Total Other (expense) income, net 486 586 Total Other (expense) income, net (5) 400 Pro forma pretax income 29,036 29,105 Pro forma pretax income 31,457 31,738

Effective tax rate 20% (+/- 2%) 20.1% 19.8% Effective tax rate 20.4% 20.0% Pro forma Net Income 23,206 23,352 Pro forma Net Income 25,049 25,391

Pro Forma EPS Fully Diluted $2.97 $2.99 Pro Forma EPS Fully Diluted $3.27 $3.33 Shares Outstanding (fully diluted) 7,801 7,807 Shares Outstanding (fully diluted) 7,652 7,623

Total Unearned Revenue - 41,250 Total Unearned Revenue - 46,647 Cash Flow from Operations 36,480 38,020 Cash Flow from Operations 39,466 43,354 Capital Expenditures 9,234 9,151 Capital Expenditures 9,770 9,700 Free cash flow 27,246 28,869 Free cash flow 29,696 33,654

Source: Thomson Reuters, Credit Suisse estimates.

26 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Valuation Methodology Base Case—Target Price = $80

Our $80 target price is based on a blended average, using 50% of our discounted cash flow (DCF) valuation and 50% based on relative comparable multiples of its peers’ valuations. Relative Industry Multiples: MSFT currently trades at a C2018 P/E multiple of 19.2x (or 17.5x excluding stock-based compensation), compared with the large-cap software peer group average of 17.4x. Given expectations for stronger revenue/EPS growth vs. peers and an increasing mix of recurring revenue, we believe a premium multiple to the peer group average is warranted. As such, we view the risk/reward profile of MSFT shares as attractive. Our $80 target price implies a P/E multiple of 22.6x on our C2018 estimate (or 20.6x excluding SBC), a premium to that of the group average and represents a ~18% premium to the current share price. We believe that this target price and multiple are warranted, given our expectations for sustained growth in Commercial Cloud while generating incremental leverage. In addition, we believe that as more of MSFT’s revenue stems from recurring sources (e.g., subscription/transactional revenue), this could lead to further multiple expansion (see slides 34 – 36). Discounted Cash Flow: Our DCF valuation uses a short-term weighted average cost of capital (WACC) to discount projected cash flows. Key inputs into our short-term WACC calculation include computing a short-term cost of equity and short-term cost of debt, along with the current market percentages of the relevant equity and debt components. For MSFT’s cost of equity, we assume a market risk premium of 10.0%, a risk-free rate of 0.2%, and a short-term beta of 1.08. We assume that MSFT’s short-term cost of debt is 6.0%. Given its current debt-to-equity ratio of 16%, the company’s short-term WACC is 10.0%. We calculate our discount factors on a quarterly basis from the company’s most recently reported quarter. We project the company’s operating cash flow out ten years and apply a terminal multiple to our year-ten unlevered free cash flow estimate. Our terminal multiple is derived from a long-term growth rate and long-term WACC. Our long-term WACC assumptions use different inputs than our short-term WACC assumptions because we believe that as a company matures and demonstrates operating history, its risk/reward profile changes. For MSFT, our long-term growth rate assumption is 3.0%, roughly in-line with the long-term inflation rate, which we believe is appropriate given the company's strong Windows franchise, suite of business productivity applications (Office and Dynamics) across >1.2B users, and competitive positioning in its growth initiatives. For the company’s long-term cost of equity, we assume a risk-free rate of 2.0%, a market risk premium of 10%, and a long-term beta of 1.00. We assume that MSFT will carry long-term debt at a cost of 6.0% and a debt-to-equity ratio of 15%. According to these inputs, the long-term WACC is 10.9%, resulting in a terminal multiple of 12.6x. Given these assumptions and using the reported net cash from its most recent quarter, our DCF estimates an enterprise value and equity value on MSFT of ~$528B and ~$566B, respectively. We derive MSFT’s DCF-based target price by taking the current equity value per share and multiplying by the company’s one-year cost of equity, which results in a value of ~$80 per share.

Source: Credit Suisse estimates.

27 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Relative Industry Multiples MSFT Comparables

Market 2017E 2018E 2017E Rev. 2018E Rev. EV / Revenue EV / EBITDA EV / OCF EV / FCF 2017E EPS 2018E EPS P / E Company Cap (M) Rev. (M) Rev. (M) Gr. (yr/yr) Gr. (yr/yr) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E Gr. (yr/yr) Gr. (yr/yr) 2017E 2018E MSFT Comparables (+<15% 2018E Revenue Growth) Apple AAPL $765,526 $233,484 $249,346 6.7% 6.8% 3.4x 3.2x 10.5x 9.7x 11.6x 10.9x 15.6x 13.6x 9.6% 12.7% 15.5x 13.7x Akamai AKAM $10,910 $2,555 $2,858 9.2% 11.8% 4.2x 3.7x 10.9x 9.7x 12.5x 11.1x 23.4x 21.4x 0.4% 14.2% 23.0x 20.1x Amdocs DOX $9,046 $3,905 $4,061 4.0% 4.0% 2.1x 2.0x 10.3x 9.9x 12.5x 11.1x 15.5x Nmf 6.0% 7.8% 16.0x 14.9x CA Inc CA $13,551 $4,020 $4,057 (0.3%) 0.9% 3.2x 3.2x 8.6x 8.3x 12.7x 12.2x 13.4x 12.7x (7.1%) 6.3% 13.7x 12.9x Cisco CSCO $168,336 $48,824 $50,024 (0.1%) 2.5% 2.7x 2.6x 7.8x 7.6x 9.4x 9.0x 10.5x 9.9x 2.5% 4.6% 13.8x 13.2x Check Point CHKP $17,671 $1,871 $1,996 7.5% 6.7% 8.7x 8.2x 16.0x 15.2x 16.3x 15.6x 16.7x 16.1x 9.7% 9.2% 20.1x 18.4x Citrix Systems CTXS $13,312 $2,831 $2,947 (17.2%) 4.1% 4.6x 4.4x 12.3x 11.7x 12.8x 12.0x 13.9x 13.2x (12.7%) 9.2% 18.1x 16.6x Intuit INTU $30,111 $5,290 $5,490 9.0% 3.8% 5.8x 5.6x 14.5x 14.6x 18.6x 19.4x 21.9x 23.6x 22.6% 9.8% 24.7x 22.5x Microsoft MSFT $531,814 $100,764 $107,689 8.2% 6.9% 4.9x 4.6x 13.1x 11.7x 12.2x 11.0x 16.0x 14.2x 4.9% 16.3% 22.3x 19.2x Oracle ORCL $187,877 $38,086 $39,453 2.2% 3.6% 4.8x 4.6x 10.5x 10.0x 13.1x 11.9x 14.8x 14.2x 4.8% 8.2% 16.3x 15.0x Open Text OTEX $8,541 $2,484 $2,721 20.2% 9.5% 3.7x 3.4x 10.4x 9.3x 13.9x 12.0x 15.3x 12.7x 18.8% 14.0% 15.1x 13.3x Red Hat RHT $15,893 $2,690 $3,044 14.4% 13.2% 5.6x 5.0x 21.4x 19.3x 17.8x 15.9x 19.6x 17.3x 16.2% 16.6% 34.2x 29.3x SAP SAP $120,200 $26,071 $27,843 10.1% 6.8% 4.6x 4.3x 14.3x 13.0x 21.5x 19.1x 26.6x 23.4x 11.1% 8.0% 21.6x 20.0x Symantec SYMC $19,375 $4,980 $5,451 23.7% 9.5% 4.2x 3.8x 9.0x 8.5x 19.8x 13.9x 19.7x Nmf 41.0% 19.0% 19.3x 16.2x IBM IBM $151,705 $78,269 $78,163 (2.1%) (0.1%) 2.3x 2.4x 9.9x 9.7x 11.8x 11.5x 16.9x 16.6x 0.9% 1.8% 11.7x 11.5x Verisign VRSN $11,143 $1,151 $1,187 0.7% 3.1% 9.7x 9.4x 13.9x 13.4x 17.2x 16.3x 16.6x 16.1x 7.4% 8.5% 22.9x 21.1x Simple Average $129,688 $34,830 $36,646 6.0% 5.8% 4.7x 4.4x 12.1x 11.4x 14.6x 13.3x 17.3x 16.1x 8.5% 10.4% 19.3x 17.4x Market Cap Weighted Average 5.8% 5.6% 4.0x 3.8x 11.3x 10.5x 12.6x 11.7x 16.1x 14.4x 7.1% 11.4% 17.7x 15.8x Median $18,523 $4,500 $4,756 7.1% 5.4% 4.4x 4.1x 10.7x 9.9x 12.9x 12.0x 16.3x 15.2x 6.7% 9.2% 18.7x 16.4x

MSFT excluding stock-based compensation: 5.3% 15.7% 20.2x 17.5x

Source: Thomson Reuters, Credit Suisse estimates.

28 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Multiples Analysis and Sensitivity Multiples Valuation

MSFT.O Valuation Sensitivity Analysis Based on Target Multiple Dollars and Shares in Millions Target Multiple: 20.6x Multiple Price: $80.00 Valuation @ Valuation @ Dec '18 P/E Multiple Current Price $67.92 12- Month Multiple Price $80.00 14.6x 16.6x 18.6x 20.6x 22.6x 24.6x 26.6x Calendar Year Ended: 2016A 2017E 2018E 2017E 2018E +15%: $4.47 $65 $74 $83 $92 $101 $110 $119 Dec '16 Dec '17 Dec '18 Dec '17 Dec '18 +10% $4.28 $62 $71 $79 $88 $97 $105 $114 Price $67.92 $67.92 $67.92 $80.00 $80.00 +5%: $4.08 $59 $68 $76 $84 $92 $100 $109 Fully Diluted Shares 7,830 7,830 7,830 7,830 7,830 CS Revenue Est.: $3.89 $57 $64 $72 $80 $88 $96 $103 Market Capitalization $531,814 $531,814 $531,814 $626,400 $626,400 -5%: $3.69 $54 $61 $69 $76 $83 $91 $98

Dec '18 EPS (PF) '18 EPS Dec -10%: $3.50 $51 $58 $65 $72 $79 $86 $93 Less: Net Cash (37,811) (37,811) (37,811) (37,811) (37,811) -15%: $3.31 $48 $55 $61 $68 $75 $81 $88 • Net Cash / Share ($4.83) ($4.83) ($4.83) ($4.83) ($4.83) *EPS excludes stock-based compensation Enterprise Value $494,003 $494,003 $494,003 $588,589 $588,589 • EV / Share $63.09 $63.09 $63.09 $75.17 $75.17 MSFT.O Valuation Sensitivity Analysis Based on Target Price Target Price: $80.00 Revenue $93,118 $100,764 $107,689 $100,764 107,689 Dec '18 Target Price • % Change Yr/Yr 2.0% 8.2% 6.9% 8.2% 6.9% $50 $60 $70 $80 $90 $100 $110 +15%: $4.47 11.2x 13.4x 15.7x 17.9x 20.1x 22.4x 24.6x EV / Revenue 5.3x 4.9x 4.6x 5.8x 5.5x +10% $4.28 11.7x 14.0x 16.4x 18.7x 21.0x 23.4x 25.7x +5%: $4.08 12.2x 14.7x 17.1x 19.6x 22.0x 24.5x 26.9x Recurring Revenue $27,349 $37,781 $47,916 $37,781 47,916 CS Revenue Est.: $3.89 12.9x 15.4x 18.0x 20.6x 23.1x 25.7x 28.3x • % Change Yr/Yr 73.1% 38.1% 26.8% 38.1% 26.8% -5%: $3.69 13.5x 16.2x 18.9x 21.7x 24.4x 27.1x 29.8x

-10%: $3.50 14.3x 17.1x 20.0x 22.9x 25.7x 28.6x 31.4x Dec '18 EPS (PF) '18 EPS Dec EV / Recurring Revenue 18.1x 13.1x 10.3x 15.6x 12.3x -15%: $3.31 15.1x 18.1x 21.2x 24.2x 27.2x 30.2x 33.3x *EPS excludes stock-based compensation EBITDA $35,904 $37,812 $42,243 $37,812 42,243

EV / EBITDA 13.8x 13.1x 11.7x 15.6x 13.9x

EPS (PF) $2.91 $3.05 $3.55 $3.05 $3.55 • % Change Yr/Yr 7.7% 4.9% 16.3% 4.9% 16.3%

P/E Multiple 23.4x 22.3x 19.2x 26.2x 22.6x

EPS (PF, Excl. ESO) $3.19 $3.36 $3.89 $3.36 $3.89 • % Change Yr/Yr 8.1% 5.3% 15.7% 5.3% 15.7%

P/E Multiple (Excl. SBC) 21.3x 20.2x 17.5x 23.8x 20.6x

PEG Ratio 3.0x 4.6x 1.2x 5.4x 1.4x

Operating Cash Flow $36,673 $40,612 $44,969 $40,612 $44,969 • Operating Cash Flow / Share $4.68 $5.19 $5.74 $5.19 $5.74

EV / Operating Cash Flow 13.5x 12.2x 11.0x 14.5x 13.1x

Free Cash Flow $27,559 $30,912 $34,738 $30,912 $34,738 • Free Cash Flow / Share $3.52 $3.95 $4.44 $3.95 $4.44

EV / Free Cash Flow 17.9x 16.0x 14.2x 19.0x 16.9x EV / Free Cash Flow / Grow th 1.4x 1.3x 1.1x 1.6x 1.4x FCF Yield 5.2% 5.8% 6.5% 4.9% 5.5%

Note: Pro forma, excluding stock compensation expense, amortization of acquired intangibles, and other

Source: Thomson Reuters, Credit Suisse estimates.

29 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Discounted Cash Flow DCF Valuation

Amounts in US$millions, except per share data

F2016 F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E 10-Year CAGR

Total revenue $91,963 $96,521 $104,128 $111,480 $118,879 $126,296 $133,703 $141,073 $148,384 $155,611 $162,736 5.9% % growth y-o-y 5.0% 7.9% 7.1% 6.6% 6.2% 5.9% 5.5% 5.2% 4.9% 4.6%

EBITDA $34,557 $36,977 $40,427 $44,430 $48,139 $51,966 $55,903 $59,943 $64,078 $68,299 $72,601 7.7% EBITDA margin 37.6% 38.3% 38.8% 39.9% 40.5% 41.1% 41.8% 42.5% 43.2% 43.9% 44.6% % growth y-o-y 7.0% 9.3% 9.9% 8.3% 8.0% 7.6% 7.2% 6.9% 6.6% 6.3%

EBIT $27,935 $28,519 $31,338 $34,920 $37,997 $41,192 $44,498 $47,909 $51,420 $55,025 $58,719 7.7% Operating margin 30.4% 29.5% 30.1% 31.3% 32.0% 32.6% 33.3% 34.0% 34.7% 35.4% 36.1% % growth y-o-y 2.1% 9.9% 11.4% 8.8% 8.4% 8.0% 7.7% 7.3% 7.0% 6.7%

Cash tax rate 18.8% 19.8% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

EBIT * (1-Tax) $22,678 $22,882 $25,071 $27,936 $30,398 $32,954 $35,598 $38,327 $41,136 $44,020 $46,975 7.6% + D&A 6,622 8,457 9,089 9,510 10,141 10,774 11,406 12,034 12,658 13,274 13,882 % of revenue 7.2% 8.8% 8.7% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% - CapEx and CapContent (8,343) (9,151) (9,700) (10,462) (11,097) (11,726) (12,347) (12,957) (13,554) (14,137) (14,703) % of revenue 9.1% 9.5% 9.3% 9.4% 9.3% 9.3% 9.2% 9.2% 9.1% 9.1% 9.0% + ∆ WC (1,276) 6,592 4,163 4,242 5,799 6,097 6,388 6,669 6,941 7,201 7,449 % of revenue -1.4% 6.8% 4.0% 3.8% 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6% uFCF $19,681 $28,781 $28,623 $31,226 $35,241 $38,098 $41,045 $44,074 $47,180 $50,359 $53,604 10.5% % growth y-o-y 46.2% -0.5% 9.1% 12.9% 8.1% 7.7% 7.4% 7.0% 6.7% 6.4% Shares 8,002 7,807 7,623 7,439 7,255 7,071 6,887 6,703 6,519 6,335 6,151 % growth y-o-y (dilution rate) 8.7% 8.1% 7.3% 6.7% 6.1% 5.6% 5.2% 4.8% 4.4% 4.1% 3.8% UFCF/share $2.46 $3.69 $3.75 $4.20 $4.86 $5.39 $5.96 $6.58 $7.24 $7.95 $8.71 13.5% % growth y-o-y 49.9% 1.9% 11.8% 15.7% 10.9% 10.6% 10.3% 10.1% 9.8% 9.6%

F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E Last Reported Quarter F2017 Q2 Discount multiplier with WACC = 10.0% Quarter September 0% 0.0000 0.9309 0.8462 0.7692 0.6992 0.6355 0.5777 0.5251 0.4773 0.4339 Quarter December 0% 0.0000 0.9090 0.8262 0.7510 0.6827 0.6206 0.5641 0.5127 0.4661 0.4236 Quarter March 100% 0.9764 0.8876 0.8068 0.7333 0.6666 0.6059 0.5508 0.5006 0.4551 0.4137 Quarter June 0.9534 0.8666 0.7878 0.7161 0.6509 0.5916 0.5378 0.4888 0.4443 0.4039 Year 0 1 2 3 4 5 6 7 8 9 10 PV of uFCF $13,885 $25,718 $25,503 $26,163 $25,710 $25,177 $24,575 $23,912 $23,200 $22,448

Price Per Share F2017 Q2 Valuation Sensitivity Short Term Discount Rate - WACC Total PV of Projected FCF $236,292 $80.24 8.01% 9.01% 10.01% 11.01% 12.01% PV of Terminal Value $291,933 1.00% 81.00 76.26 71.90 67.89 64.19 Total PV of Operations (Enterprise Value) $528,225 2.00% 85.38 80.28 75.60 71.30 67.34 Plus: Cash $122,781 123 3.00% 90.86 85.33 80.24 75.57 71.27

Less: Debt (mrq) -$84,970 Growth 4.00% 97.93 91.83 86.22 81.08 76.35 Equity Value $566,036 5.00% 107.39 100.52 94.22 88.45 83.14 Shares Outstanding 7,830 8 Current Value Per Share $72.29 Risk / Reward 8.01% 9.01% 10.01% 11.01% 12.01% 12-month Price Per Share $80.24 1.00% 19.3% 12.3% 5.9% 0.0% -5.5% Current Share Price $67.92 $67.92 2.00% 25.7% 18.2% 11.3% 5.0% -0.9% Discount / Premium to Current Value 6.4% 18.1% 3.00% 33.8% 25.6% 18.1% 11.3% 4.9%

4.00% 44.2% 35.2% 26.9% 19.4% 12.4%

% Upside / / Upside % Downside to to Downside

Cost of Equity F2017 Q2 F2026E CurrentPrice 5.00% 58.1% 48.0% 38.7% 30.2% 22.4% Risk Free Rate 0.20% 2.00% Beta 1.08 1.00 Risk Premium 10.00% 10.00% Cost of Equity 11.00% 12.00%

Source: Thomson Reuters, Credit Suisse estimates.

30 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Valuation—Blue Sky/Grey Sky Blue Sky Scenario = $90, Grey Sky Scenario = $50

Our Blue Sky Scenario (US$) = $90 Better-than-expected traction in Commercial Cloud, further monetization of its large piracy base, increased penetration in emerging markets, and continued operational efficiencies driven by significant economies of scale result in revenue CAGR of +6.3% from F2020 to F2026 and terminal operating margin of 41.1%. This yields a blue sky scenario of $90 per share, which implies a C2018 P/E multiple of 25.4x (or 23.1x excl. SBC), EV/EBITDA multiple of 15.8x, EV/OCF multiple of 14.8x, and EV/FCF multiple of 19.2x.

Our Grey Sky Scenario (US$) = $50 Increased competition, heavier-than-anticipated pricing discounts, failure to successfully integrated large M&A transactions, and unexpected delays in software upgrades/new product offerings result in revenue CAGR of only +3.2% from F2020 to F2026 and terminal operating margin of 20.8%. This yields a grey sky scenario of $50 per share, which implies a C2018 P/E multiple of 14.1x (or 12.9x excl. SBC), EV/EBITDA multiple of 8.4x, EV/OCF multiple of 7.9x, and EV/FCF multiple of 10.2x.

Source: Credit Suisse estimates.

31 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Discounted Cash Flow DCF Valuation—Blue Sky Scenario

Amounts in US$millions, except per share data

F2016 F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E 10-Year CAGR

Total revenue $91,963 $96,521 $104,128 $111,480 $119,116 $127,029 $135,215 $143,667 $152,378 $161,340 $170,544 6.4% % growth y-o-y 5.0% 7.9% 7.1% 6.8% 6.6% 6.4% 6.3% 6.1% 5.9% 5.7%

EBITDA $34,557 $36,977 $40,427 $44,430 $48,947 $53,832 $59,109 $64,800 $70,931 $77,526 $84,611 9.4% EBITDA margin 37.6% 38.3% 38.8% 39.9% 41.1% 42.4% 43.7% 45.1% 46.5% 48.1% 49.6% % growth y-o-y 7.0% 9.3% 9.9% 10.2% 10.0% 9.8% 9.6% 9.5% 9.3% 9.1%

EBIT $27,935 $28,519 $31,338 $34,920 $38,785 $42,996 $47,574 $52,545 $57,932 $63,762 $70,062 9.6% Operating margin 30.4% 29.5% 30.1% 31.3% 32.6% 33.8% 35.2% 36.6% 38.0% 39.5% 41.1% % growth y-o-y 2.1% 9.9% 11.4% 11.1% 10.9% 10.6% 10.4% 10.3% 10.1% 9.9%

Cash tax rate 18.8% 19.8% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

EBIT * (1-Tax) $22,678 $22,882 $25,071 $27,936 $31,028 $34,397 $38,060 $42,036 $46,346 $51,010 $56,050 9.5% + D&A 6,622 8,457 9,089 9,510 10,161 10,836 11,535 12,256 12,999 13,763 14,548 % of revenue 7.2% 8.8% 8.7% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% - CapEx and CapContent (8,343) (9,151) (9,700) (10,462) (11,119) (11,794) (12,487) (13,195) (13,919) (14,657) (15,408) % of revenue 9.1% 9.5% 9.3% 9.4% 9.3% 9.3% 9.2% 9.2% 9.1% 9.1% 9.0% + ∆ WC (1,276) 6,592 4,163 4,242 5,810 6,132 6,460 6,792 7,128 7,466 7,807 % of revenue -1.4% 6.8% 4.0% 3.8% 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6% uFCF $19,681 $28,781 $28,623 $31,226 $35,881 $39,571 $43,568 $47,888 $52,553 $57,582 $62,997 12.3% % growth y-o-y 46.2% -0.5% 9.1% 14.9% 10.3% 10.1% 9.9% 9.7% 9.6% 9.4% Shares 8,002 7,807 7,623 7,439 7,255 7,071 6,887 6,703 6,519 6,335 6,151 % growth y-o-y (dilution rate) 8.7% 8.1% 7.3% 6.7% 6.1% 5.6% 5.1% 4.7% 4.3% 3.9% 3.6% UFCF/share $2.46 $3.69 $3.75 $4.20 $4.95 $5.60 $6.33 $7.14 $8.06 $9.09 $10.24 15.3% % growth y-o-y 49.9% 1.9% 11.8% 17.8% 13.2% 13.0% 12.9% 12.8% 12.8% 12.7%

F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E Last Reported Quarter F2017 Q2 Discount multiplier with WACC = 10.0% Quarter September 0% 0.0000 0.9309 0.8462 0.7692 0.6992 0.6355 0.5777 0.5251 0.4773 0.4339 Quarter December 0% 0.0000 0.9090 0.8262 0.7510 0.6827 0.6206 0.5641 0.5127 0.4661 0.4236 Quarter March 100% 0.9764 0.8876 0.8068 0.7333 0.6666 0.6059 0.5508 0.5006 0.4551 0.4137 Quarter June 0.9534 0.8666 0.7878 0.7161 0.6509 0.5916 0.5378 0.4888 0.4443 0.4039 Year 0 1 2 3 4 5 6 7 8 9 10 PV of uFCF $13,885 $25,718 $25,503 $26,638 $26,704 $26,725 $26,702 $26,635 $26,528 $26,381

Price Per Share F2017 Q2 Valuation Sensitivity Short Term Discount Rate - WACC Total PV of Projected FCF $251,420 $89.64 8.01% 9.01% 10.01% 11.01% 12.01% PV of Terminal Value $343,089 1.00% 90.29 84.84 79.83 75.23 70.99 Total PV of Operations (Enterprise Value) $594,509 2.00% 95.44 89.57 84.19 79.24 74.69 Plus: Cash $122,781 123 3.00% 101.88 95.50 89.64 84.26 79.31

Less: Debt (mrq) -$84,970 Growth 4.00% 110.19 103.14 96.67 90.73 85.28 Equity Value $632,320 5.00% 121.31 113.36 106.07 99.39 93.26 Shares Outstanding 7,830 8 Current Value Per Share $80.76 Risk / Reward 8.01% 9.01% 10.01% 11.01% 12.01% 12-month Price Per Share $89.64 1.00% 32.9% 24.9% 17.5% 10.8% 4.5% Current Share Price $67.92 $67.92 2.00% 40.5% 31.9% 23.9% 16.7% 10.0% Discount / Premium to Current Value 18.9% 32.0% 3.00% 50.0% 40.6% 32.0% 24.1% 16.8%

4.00% 62.2% 51.8% 42.3% 33.6% 25.6%

% Upside / / Upside % Downside to to Downside

Cost of Equity F2017 Q2 F2026E CurrentPrice 5.00% 78.6% 66.9% 56.2% 46.3% 37.3% Risk Free Rate 0.20% 2.00% Beta 1.08 1.00 Risk Premium 10.00% 10.00% Cost of Equity 11.00% 12.00%

Source: Thomson Reuters, Credit Suisse estimates.

32 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Discounted Cash Flow DCF Valuation—Grey Sky Scenario

Amounts in US$millions, except per share data

F2016 F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E 10-Year CAGR

Total revenue $91,963 $96,521 $104,128 $111,480 $117,777 $123,100 $127,550 $131,239 $134,275 $136,760 $138,785 4.2% % growth y-o-y 5.0% 7.9% 7.1% 5.6% 4.5% 3.6% 2.9% 2.3% 1.9% 1.5%

EBITDA $34,557 $36,977 $40,427 $44,430 $44,851 $44,819 $44,426 $43,757 $42,884 $41,866 $40,751 1.7% EBITDA margin 37.6% 38.3% 38.8% 39.9% 38.1% 36.4% 34.8% 33.3% 31.9% 30.6% 29.4% % growth y-o-y 7.0% 9.3% 9.9% 0.9% -0.1% -0.9% -1.5% -2.0% -2.4% -2.7%

EBIT $27,935 $28,519 $31,338 $34,920 $34,804 $34,318 $33,546 $32,562 $31,430 $30,199 $28,912 0.3% Operating margin 30.4% 29.5% 30.1% 31.3% 29.6% 27.9% 26.3% 24.8% 23.4% 22.1% 20.8% % growth y-o-y 2.1% 9.9% 11.4% -0.3% -1.4% -2.2% -2.9% -3.5% -3.9% -4.3%

Cash tax rate 18.8% 19.8% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

EBIT * (1-Tax) $22,678 $22,882 $25,071 $27,936 $27,843 $27,454 $26,837 $26,050 $25,144 $24,160 $23,130 0.2% + D&A 6,622 8,457 9,089 9,510 10,047 10,501 10,881 11,195 11,454 11,666 11,839 % of revenue 7.2% 8.8% 8.7% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% - CapEx and CapContent (8,343) (9,151) (9,700) (10,462) (10,994) (11,429) (11,779) (12,054) (12,266) (12,424) (12,539) % of revenue 9.1% 9.5% 9.3% 9.4% 9.3% 9.3% 9.2% 9.2% 9.1% 9.1% 9.0% + ∆ WC (1,276) 6,592 4,163 4,242 5,745 5,943 6,094 6,204 6,281 6,329 6,353 % of revenue -1.4% 6.8% 4.0% 3.8% 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6% uFCF $19,681 $28,781 $28,623 $31,226 $32,641 $32,469 $32,032 $31,396 $30,614 $29,731 $28,783 3.9% % growth y-o-y 46.2% -0.5% 9.1% 4.5% -0.5% -1.3% -2.0% -2.5% -2.9% -3.2% Shares 8,002 7,807 7,623 7,439 7,255 7,071 6,887 6,703 6,519 6,335 6,151 % growth y-o-y (dilution rate) 8.7% 8.1% 7.3% 6.7% 6.2% 5.7% 5.4% 5.1% 4.9% 4.6% 4.4% UFCF/share $2.46 $3.69 $3.75 $4.20 $4.50 $4.59 $4.65 $4.68 $4.70 $4.69 $4.68 6.6% % growth y-o-y 49.9% 1.9% 11.8% 7.2% 2.1% 1.3% 0.7% 0.3% -0.1% -0.3%

F2017E F2018E F2019E F2020E F2021E F2022E F2023E F2024E F2025E F2026E Last Reported Quarter F2017 Q2 Discount multiplier with WACC = 10.0% Quarter September 0% 0.0000 0.9309 0.8462 0.7692 0.6992 0.6355 0.5777 0.5251 0.4773 0.4339 Quarter December 0% 0.0000 0.9090 0.8262 0.7510 0.6827 0.6206 0.5641 0.5127 0.4661 0.4236 Quarter March 100% 0.9764 0.8876 0.8068 0.7333 0.6666 0.6059 0.5508 0.5006 0.4551 0.4137 Quarter June 0.9534 0.8666 0.7878 0.7161 0.6509 0.5916 0.5378 0.4888 0.4443 0.4039 Year 0 1 2 3 4 5 6 7 8 9 10 PV of uFCF $13,885 $25,718 $25,503 $24,233 $21,911 $19,649 $17,506 $15,516 $13,697 $12,053

Price Per Share F2017 Q2 Valuation Sensitivity Short Term Discount Rate - WACC Total PV of Projected FCF $189,672 $49.65 8.01% 9.01% 10.01% 11.01% 12.01% PV of Terminal Value $122,721 -1.00% 51.54 49.04 46.73 44.59 42.61 Total PV of Operations (Enterprise Value) $312,393 0.00% 53.11 50.48 48.05 45.81 43.74 Plus: Cash $122,781 123 1.00% 54.99 52.21 49.65 47.28 45.09

Less: Debt (mrq) -$84,970 Growth 2.00% 57.30 54.33 51.60 49.07 46.74 Equity Value $350,204 3.00% 60.18 56.99 54.04 51.32 48.82 Shares Outstanding 7,830 8 Current Value Per Share $44.73 Risk / Reward 8.01% 9.01% 10.01% 11.01% 12.01% 12-month Price Per Share $49.65 -1.00% -24.1% -27.8% -31.2% -34.3% -37.3% Current Share Price $67.92 $67.92 0.00% -21.8% -25.7% -29.3% -32.6% -35.6% Discount / Premium to Current Value -34.1% -26.9% 1.00% -19.0% -23.1% -26.9% -30.4% -33.6%

2.00% -15.6% -20.0% -24.0% -27.7% -31.2%

% Upside / / Upside % Downside to to Downside

Cost of Equity F2017 Q2 F2026E CurrentPrice 3.00% -11.4% -16.1% -20.4% -24.4% -28.1% Risk Free Rate 0.20% 2.00% Beta 1.08 1.00 Risk Premium 10.00% 10.00% Cost of Equity 11.00% 12.00%

Source: Thomson Reuters, Credit Suisse estimates.

33 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Valuation Index—NTM Multiples Price/Earnings (NTM) Index

22.0x 20%

18%

20.0x 16% +1 Sigma 14% 18.0x

Avg = 17.0x 12%

16.0x 10%

-1 Sigma 8%

14.0x 6%

4% 12.0x

10.0x 0%

Jun-14 Jun-15 Jun-16

Mar-14 Mar-15 Mar-16 Mar-17

Sep-14 Sep-15 Sep-16

Dec-13 Dec-14 Dec-15 Dec-16

P/E Multiple % Cloud Revenue

Source: Thomson Reuters (consensus estimates), Credit Suisse.

34 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Valuation Index—NTM Multiples Enterprise Value/Sales (NTM) Index

5.0x 20%

18%

4.5x 16%

14% 4.0x +1 Sigma

12%

3.5x Avg = 3.5x 10%

3.0x -1 Sigma 6%

4% 2.5x

2.0x 0%

Jun-14 Jun-15 Jun-16

Mar-14 Mar-15 Mar-16 Mar-17

Sep-14 Sep-15 Sep-16

Dec-13 Dec-14 Dec-15 Dec-16

EV / NTM Sales % Cloud Revenue

Source: Thomson Reuters (consensus estimates), Credit Suisse.

35 Michael Nemeroff | 212-325-2052 | [email protected] V. MSFT Valuation Index—NTM Multiples Enterprise Value/Operating Cash Flow (NTM) Index

13.0x 20%

18% 12.0x 16% +1 Sigma 11.0x 14%

12% 10.0x Avg = 10.0x

10%

9.0x -1 Sigma 8%

8.0x 6%

4% 7.0x 2%

6.0x 0%

Jun-14 Jun-15 Jun-16

Mar-14 Mar-15 Mar-16 Mar-17

Sep-14 Sep-15 Sep-16

Dec-13 Dec-14 Dec-15 Dec-16

EV / NTM OCF % Cloud Revenue

Source: Thomson Reuters (consensus estimates), Credit Suisse.

36 Michael Nemeroff | 212-325-2052 | [email protected] VI. MSFT Credit Suisse HOLT® Analysis CS Forecasts Through the HOLT Framework and Market-Implied Expectations

Key takeaway: HOLT runs a CFROI® valuation methodology that adjusts for accounting, inflation and asset life distortions to forecast economic cash flows. We input our forecasts into HOLT to review fundamental drivers (i.e. returns, growth, life cycle). Incorporating our assumptions and long-term forecasts, we derive a warranted price of $81.54, which further justifies our current target price and Outperform rating.

Source: HOLT, Company data, Credit Suisse estimates.

37 Michael Nemeroff | 212-325-2052 | [email protected] VII. MSFT Investment Risks

Competitive Landscape: MSFT faces intense competition in the technology sector across several key areas, including applications, platforms, devices, and other. Competitors range in size from smaller/specialized firms whose narrower product lines may lead to a more effective deployment of technical, marketing, and financial resources to diversified global companies with significant research and development resources. In addition, many of the areas that MSFT compete in are constantly evolving and rapidly changing with new/emerging disruptive technologies. The company’s ability to remain competitive in this market depends on its success in making innovative products and services that appeal to the shifting demands of consumers and businesses. Acquisitions and Potential Impairment of Goodwill/Intangibles: As part of its long-term business strategy, MSFT expects to continue to make opportunistic and strategic acquisitions. The company recently completed its acquisition of LinkedIn for $27B in December 2016, which could pose significant challenges and risks, such as (1) failure to advance the company’s business strategy; (2) difficulty integrating new employees, business systems, and technology; and (3) other inherent risks, including potential business disruption and an uncertain product roadmap. In addition, MSFT may be required to record a significant charge to earnings via impairment of goodwill or amortizable intangible assets. For example, the company recorded >$7B charge related to its phone business, which negatively affected its earnings results. Macroeconomic Uncertainty: Global macro uncertainty (e.g., a potential slowdown of economic activity in EMEA, tightening of credit markets, or industry-specific disruption) could lead to lower IT spending and cause some of MSFT's customers to delay payments or decisions to license/subscribe new products/applications, upgrade their existing IT environments and infrastructure, and/or purchase additional services. In addition, any impact of economic conditions on its partners, such as the bankruptcy of a major distributor, OEM, or retailer, could cause sales channel disruption given MSFT’s reliance on an extensive partner and retail network. Server Outages and Disruption to Online Services: Given increasing user traffic, growth in cloud-based services, and the complexity of products and services, MSFT needs to build, purchase, and/or lease datacenters and equipment and to upgrade its technology/network infrastructure to handle increasing demand for computing power. Operational failures, such as temporary/permanent loss of customer data and/or insufficient Internet connectivity, could negatively affect user experience and diminish the quality of its products and services, which could lead to contractual liability, regulatory actions, reputational damage, and potential attrition of current/future users and subscribers. Cyber-Attacks and Security Vulnerabilities: Potential cyber-attack and security breaches could harm the company’s competitive position and lead to reduced revenue, increased costs, and liability claims. Cyber threats are constantly evolving, thereby increasing the difficulty of detecting and successfully defending against them. MSFT’s failure to keep pace with new/emerging threats could have a significant negative impact on the company’s reputation and result in theft/misuse of its customers’ data as well as the company’s intellectual property and other assets. Piracy/Protecting Intellectual Property Rights: It remains difficult for the company to fully protect its intellectual property rights and to combat unlicensed copying and use of its software on a global basis. While piracy adversely impacts revenue in the U.S., the impact on revenue from international markets is even more pronounced and significant, particularly in countries where laws are less protective of intellectual property rights. Any reduction in the legal protection of its software intellectual property rights could adversely affect the company’s earnings and results of operation.

Source: Company data, Credit Suisse Equity Research.

38 Michael Nemeroff | 212-325-2052 | [email protected] VIII. MSFT Proprietary Bottom-Up Model Request a Copy of Our MSFT Model From Your CS Salesperson

Microsoft F2016A F2017E F2018E F2019E Revenue Bottom-Up Build and Assumptions F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Amounts in US$millions, except per share data Jun '14 Jun '15 Jun '16 Jun '17 Jun '18 Jun '19 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Jun '18

Productivity and Business Processes 26,972 26,431 26,487 30,183 34,294 37,552 6,306 6,690 6,522 6,969 6,658 7,382 7,794 8,349 8,056 8,563 8,550 9,125 • % Change Yr/Yr ----- (2.0)% 0.2% 14.0% 13.6% 9.5% (2.8)% (1.9)% 1.0% 4.6% 5.6% 10.3% 19.5% 19.8% 21.0% 16.0% 9.7% 9.3% • % Change Q/Q ------(5.3)% 6.1% (2.5)% 6.9% (4.5)% 10.9% 5.6% 7.1% (3.5)% 6.3% (0.2)% 6.7% • % of Total Revenue 31.1% 28.2% 28.8% 31.3% 32.9% 33.7% 29.1% 26.0% 29.5% 30.8% 29.8% 28.3% 33.0% 34.1% 33.0% 30.3% 33.9% 34.7%

Office Consumer 3,623 2,998 2,933 3,239 3,417 3,588 722 683 756 772 780 839 802 818 827 889 842 859 • % Change Yr/Yr 2.3% (17.3)% (2.2)% 10.4% 5.5% 5.0% (12.7)% (13.5)% 3.1% 19.1% 8.0% 22.8% 6.0% 6.0% 6.0% 6.0% 5.0% 5.0% • % Change Q/Q ------11.4% (5.4)% 10.7% 2.1% 1.0% 7.6% (4.5)% 2.1% 1.0% 7.6% (5.4)% 2.1% • % of Total Revenue 4.2% 3.2% 3.2% 3.4% 3.3% 3.2% 3.3% 2.7% 3.4% 3.4% 3.5% 3.2% 3.4% 3.3% 3.4% 3.2% 3.3% 3.3%

Office Commercial 20,682 20,476 20,611 21,933 23,626 25,718 5,033 5,187 4,955 5,437 5,297 5,476 5,322 5,838 5,733 5,870 5,755 6,267 • % Change Yr/Yr ----- (1.0)% 0.7% 6.4% 7.7% 8.9% (1.9)% (0.7)% 0.4% 4.8% 5.2% 5.6% 7.4% 7.4% 8.2% 7.2% 8.1% 7.3% • % Change Q/Q ------(3.0)% 3.1% (4.5)% 9.7% (2.6)% 3.4% (2.8)% 9.7% (1.8)% 2.4% (2.0)% 8.9% • % of Total Revenue 23.8% 21.9% 22.4% 22.7% 22.7% 23.1% 23.2% 20.2% 22.4% 24.0% 23.7% 21.0% 22.5% 23.8% 23.5% 20.8% 22.8% 23.9%

Dynamics 1,861 2,078 2,162 2,306 2,440 2,635 391 598 586 587 434 640 615 617 456 672 652 660 • % Change Yr/Yr 9.1% 11.7% 4.1% 6.6% 5.8% 8.0% 3.0% 3.0% 4.0% 6.0% 11.0% 7.0% 5.0% 5.0% 5.0% 5.0% 6.0% 7.0% • % Change Q/Q ------(29.4)% 53.0% (2.0)% 0.2% (26.1)% 47.5% (3.8)% 0.2% (26.1)% 47.5% (2.9)% 1.1% • % of Total Revenue 2.1% 2.2% 2.4% 2.4% 2.3% 2.4% 1.8% 2.3% 2.7% 2.6% 1.9% 2.5% 2.6% 2.5% 1.9% 2.4% 2.6% 2.5%

Office Consumer Services & Other 807 879 781 565 554 732 161 222 225 173 148 199 105 113 42 73 207 232 • % Change Yr/Yr ----- 9.0% (11.2)% (27.6)% (1.9)% 32.1% 5.0% (2.8)% (0.2)% (36.5)% (8.1)% (10.3)% (53.5)% (34.4)% (71.4)% (63.4)% 97.9% 104.4% • % Change Q/Q ------(40.9)% 37.9% 1.5% (23.2)% (14.5)% 34.5% (47.3)% 8.2% (62.7)% 72.1% 184.9% 11.7% • % of Total Revenue 0.9% 0.9% 0.8% 0.6% 0.5% 0.7% 0.7% 0.9% 1.0% 0.8% 0.7% 0.8% 0.4% 0.5% 0.2% 0.3% 0.8% 0.9%

LinkedIn - - - 2,140 4,258 4,880 - - - - - 228 950 962 999 1,059 1,093 1,107 • % Change Yr/Yr ------99.0% 14.6% ------364.5% 15.1% 15.1% • % Change Q/Q ------316.7% 1.3% 3.8% 6.0% 3.2% 1.3% • % of Total Revenue 0.0% 0.0% 0.0% 2.2% 4.1% 4.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.9% 4.0% 3.9% 4.1% 3.8% 4.3% 4.2%

Intelligent Cloud 21,732 23,715 25,042 27,139 29,972 33,269 5,892 6,343 6,096 6,711 6,382 6,861 6,614 7,281 6,924 7,547 7,309 8,192 • % Change Yr/Yr ----- 9.1% 5.6% 8.4% 10.4% 11.0% 7.6% 5.0% 3.3% 6.6% 8.3% 8.2% 8.5% 8.5% 8.5% 10.0% 10.5% 12.5% • % Change Q/Q ------(6.4)% 7.7% (3.9)% 10.1% (4.9)% 7.5% (3.6)% 10.1% (4.9)% 9.0% (3.2)% 12.1% • % of Total Revenue 25.0% 25.3% 27.2% 28.1% 28.8% 29.8% 27.2% 24.7% 27.6% 29.6% 28.6% 26.3% 28.0% 29.7% 28.4% 26.7% 29.0% 31.2%

Server Products and Cloud Services 16,993 18,649 19,441 21,564 24,163 27,250 4,548 4,933 4,701 5,259 5,034 5,510 5,230 5,790 5,531 6,159 5,849 6,625 • % Change Yr/Yr ----- 9.7% 4.2% 10.9% 12.1% 12.8% 7.1% 3.8% 1.2% 5.1% 10.7% 11.7% 11.3% 10.1% 9.9% 11.8% 11.8% 14.4% • % Change Q/Q ------(9.1)% 8.5% (4.7)% 11.9% (4.3)% 9.5% (5.1)% 10.7% (4.5)% 11.4% (5.0)% 13.3% • % of Total Revenue 19.6% 19.9% 21.1% 22.3% 23.2% 24.4% 21.0% 19.2% 21.3% 23.2% 22.5% 21.1% 22.1% 23.6% 22.7% 21.8% 23.2% 25.2%

Enterprise Services 4,739 5,066 5,601 5,575 5,808 6,018 1,344 1,410 1,395 1,452 1,348 1,351 1,384 1,492 1,394 1,388 1,460 1,567 • % Change Yr/Yr ----- 6.9% 10.6% (0.5)% 4.2% 3.6% 9.4% 9.6% 10.9% 12.3% 0.3% (4.2)% (0.8)% 2.7% 3.4% 2.7% 5.5% 5.0% • % Change Q/Q ------3.9% 4.9% (1.1)% 4.1% (7.2)% 0.2% 2.4% 7.8% (6.6)% (0.4)% 5.2% 7.3% • % of Total Revenue 5.5% 5.4% 6.1% 5.8% 5.6% 5.4% 6.2% 5.5% 6.3% 6.4% 6.0% 5.2% 5.9% 6.1% 5.7% 4.9% 5.8% 6.0%

More Personal Computing 38,407 42,953 40,477 39,200 39,862 40,659 9,462 12,660 9,458 8,897 9,294 11,823 9,222 8,861 9,433 12,119 9,360 8,950 • % Change Yr/Yr ----- 11.8% (5.8)% (3.2)% 1.7% 2.0% (15.8)% (4.1)% 1.6% (3.3)% (1.8)% (6.6)% (2.5)% (0.4)% 1.5% 2.5% 1.5% 1.0% • % Change Q/Q ------2.8% 33.8% (25.3)% (5.9)% 4.5% 27.2% (22.0)% (3.9)% 6.5% 28.5% (22.8)% (4.4)% • % of Total Revenue 44.2% 45.9% 44.0% 40.6% 38.3% 36.5% 43.7% 49.3% 42.8% 39.3% 41.6% 45.4% 39.0% 36.2% 38.6% 42.9% 37.1% 34.1%

Window s 20,424 18,299 17,428 17,576 17,555 17,574 4,392 4,558 4,039 4,439 4,407 4,707 4,100 4,362 4,392 4,713 4,093 4,357 • % Change Yr/Yr ----- (10.4)% (4.8)% 0.8% (0.1)% 0.1% (6.8)% (8.5)% (6.7)% 4.0% 0.3% 3.3% 1.5% (1.7)% (0.3)% 0.1% (0.2)% (0.1)% • % Change Q/Q ------2.9% 3.8% (11.4)% 9.9% (0.7)% 6.8% (12.9)% 6.4% 0.7% 7.3% (13.2)% 6.5% • % of Total Revenue 23.5% 19.6% 19.0% 18.2% 16.9% 15.8% 20.3% 17.7% 18.3% 19.6% 19.7% 18.1% 17.3% 17.8% 18.0% 16.7% 16.2% 16.6%

Devices 4,458 11,417 7,731 5,732 5,666 6,076 1,827 2,552 1,922 1,430 1,334 1,638 1,414 1,346 1,221 1,700 1,364 1,381 • % Change Yr/Yr ----- 156.1% (32.3)% (25.9)% (1.1)% 7.2% (49.1)% (26.0)% (11.4)% (35.4)% (27.0)% (35.8)% (26.4)% (5.9)% (8.4)% 3.8% (3.5)% 2.6% • % Change Q/Q ------(17.4)% 39.7% (24.7)% (25.6)% (6.7)% 22.8% (13.7)% (4.8)% (9.2)% 39.1% (19.8)% 1.3% • % of Total Revenue 5.1% 12.2% 8.4% 5.9% 5.4% 5.4% 8.4% 9.9% 8.7% 6.3% 6.0% 6.3% 6.0% 5.5% 5.0% 6.0% 5.4% 5.3%

Gaming 9,943 8,868 8,982 8,705 8,835 8,924 2,006 3,699 1,745 1,532 1,896 3,595 1,728 1,486 1,924 3,649 1,753 1,508 • % Change Yr/Yr ----- (10.8)% 1.3% (3.1)% 1.5% 1.0% 0.5% 5.5% 3.8% (9.0)% (5.5)% (2.8)% (1.0)% (3.0)% 1.5% 1.5% 1.5% 1.5% • % Change Q/Q ------19.1% 84.4% (52.8)% (12.2)% 23.8% 89.6% (51.9)% (14.0)% 29.5% 89.6% (51.9)% (14.0)% • % of Total Revenue 11.5% 9.5% 9.8% 9.0% 8.5% 8.0% 9.3% 14.4% 7.9% 6.8% 8.5% 13.8% 7.3% 6.1% 7.9% 12.9% 7.0% 5.7%

Search 3,581 4,369 6,336 7,188 7,806 8,086 1,237 1,851 1,752 1,496 1,657 1,883 1,981 1,668 1,896 2,057 2,149 1,703 • % Change Yr/Yr ----- 22.0% 45.0% 13.4% 8.6% 3.6% 31.7% 46.5% 55.5% 44.0% 34.0% 1.7% 13.0% 11.4% 14.4% 9.3% 8.5% 2.1% • % Change Q/Q ------19.0% 49.6% (5.3)% (14.6)% 10.7% 13.6% 5.2% (15.8)% 13.7% 8.5% 4.5% (20.8)% • % of Total Revenue 4.1% 4.7% 6.9% 7.4% 7.5% 7.3% 5.7% 7.2% 7.9% 6.6% 7.4% 7.2% 8.4% 6.8% 7.8% 7.3% 8.5% 6.5%

Commercial Cloud Revenue 2,807 5,770 9,342 14,403 20,437 27,419 1,922 2,116 2,432 2,873 3,108 3,288 3,692 4,315 4,543 4,698 5,193 6,002 • % Change Yr/Yr 116.0% 105.6% 61.9% 54.2% 41.9% 34.2% 63.0% 62.0% 61.9% 61.1% 61.7% 55.4% 51.8% 50.2% 46.2% 42.9% 40.7% 39.1% • % Change Q/Q ------7.8% 10.1% 14.9% 18.1% 8.2% 5.8% 12.3% 16.9% 5.3% 3.4% 10.5% 15.6% • % of Total Revenue 3.2% 6.2% 10.2% 14.9% 19.6% 24.6% 8.9% 8.2% 11.0% 12.7% 13.9% 12.6% 15.6% 17.6% 18.6% 16.6% 20.6% 22.9%

Source: Credit Suisse estimates.

39 Michael Nemeroff | 212-325-2052 | [email protected] VIII. MSFT Financial Model Income Statement

Microsoft F2016A F2017E F2018E F2019E Revenue Assumptions F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Amounts in US$millions, except per share data Jun '14 Jun '15 Jun '16 Jun '17 Jun '18 Jun '19 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Jun '18

Productivity and Business Processes 26,972 26,431 26,487 30,183 34,294 37,552 6,306 6,690 6,522 6,969 6,658 7,382 7,794 8,349 8,056 8,563 8,550 9,125 • % Change Yr/Yr ----- (2.0)% 0.2% 14.0% 13.6% 9.5% (2.8)% (1.9)% 1.0% 4.6% 5.6% 10.3% 19.5% 19.8% 21.0% 16.0% 9.7% 9.3% • % Change Q/Q ------(5.3)% 6.1% (2.5)% 6.9% (4.5)% 10.9% 5.6% 7.1% (3.5)% 6.3% (0.2)% 6.7% • % Annual ------23.8% 25.3% 24.6% 26.3% 22.1% 24.5% 25.8% 27.7% 23.5% 25.0% 24.9% 26.6%

Intelligent Cloud 21,732 23,715 25,042 27,139 29,972 33,269 5,892 6,343 6,096 6,711 6,382 6,861 6,614 7,281 6,924 7,547 7,309 8,192 • % Change Yr/Yr ----- 9.1% 5.6% 8.4% 10.4% 11.0% 7.6% 5.0% 3.3% 6.6% 8.3% 8.2% 8.5% 8.5% 8.5% 10.0% 10.5% 12.5% • % Change Q/Q ------(6.4)% 7.7% (3.9)% 10.1% (4.9)% 7.5% (3.6)% 10.1% (4.9)% 9.0% (3.2)% 12.1% • % Annual ------23.5% 25.3% 24.3% 26.8% 23.5% 25.3% 24.4% 26.8% 23.1% 25.2% 24.4% 27.3%

More Personal Computing 38,407 42,953 40,477 39,200 39,862 40,659 9,462 12,660 9,458 8,897 9,294 11,823 9,222 8,861 9,433 12,119 9,360 8,950 • % Change Yr/Yr ----- 11.8% (5.8)% (3.2)% 1.7% 2.0% (15.8)% (4.1)% 1.6% (3.3)% (1.8)% (6.6)% (2.5)% (0.4)% 1.5% 2.5% 1.5% 1.0% • % Change Q/Q ------2.8% 33.8% (25.3)% (5.9)% 4.5% 27.2% (22.0)% (3.9)% 6.5% 28.5% (22.8)% (4.4)% • % Annual ------23.4% 31.3% 23.4% 22.0% 23.7% 30.2% 23.5% 22.6% 23.7% 30.4% 23.5% 22.5%

Total Revenue 86,833 93,580 91,963 96,521 104,128 111,480 21,660 25,693 22,076 22,642 22,334 26,066 23,630 24,492 24,414 28,229 25,218 26,267 • % Change Yr/Yr 11.5% 7.8% (1.7)% 5.0% 7.9% 7.1% (6.6)% (2.9)% 1.6% 2.1% 3.1% 1.5% 7.0% 8.2% 9.3% 8.3% 6.7% 7.2% • % Change Q/Q ------(2.3)% 18.6% (14.1)% 2.6% (1.4)% 16.7% (9.3)% 3.6% (0.3)% 15.6% (10.7)% 4.2% • % Annual ------23.5% 27.9% 24.0% 24.6% 23.1% 27.0% 24.5% 25.4% 23.4% 27.1% 24.2% 25.2% Productivity and Business Processes % of Revenue 31.1% 28.2% 28.8% 31.3% 32.9% 33.7% 29.1% 26.0% 29.5% 30.8% 29.8% 28.3% 33.0% 34.1% 33.0% 30.3% 33.9% 34.7% Intelligent Cloud % of Revenue 25.0% 25.3% 27.2% 28.1% 28.8% 29.8% 27.2% 24.7% 27.6% 29.6% 28.6% 26.3% 28.0% 29.7% 28.4% 26.7% 29.0% 31.2% More Personal Computing % of Revenue 44.2% 45.9% 44.0% 40.6% 38.3% 36.5% 43.7% 49.3% 42.8% 39.3% 41.6% 45.4% 39.0% 36.2% 38.6% 42.9% 37.1% 34.1% Product 72,948 75,956 61,502 60,726 61,524 58,055 15,219 17,974 14,321 13,988 13,493 16,537 15,301 15,395 14,885 17,402 14,564 14,672 • % Change Yr/Yr ----- 4.1% (19.0)% (1.3)% 1.3% (5.6)% ------(19.4)% (11.3)% (8.0)% 6.8% 10.1% 10.3% 5.2% (4.8)% (4.7)% • % Change Q/Q ------(12.4)% 18.1% (20.3)% (2.3)% (3.5)% 22.6% (7.5)% 0.6% (3.3)% 16.9% (16.3)% 0.7% • % Annual ------24.7% 29.2% 23.3% 22.7% 22.2% 27.2% 25.2% 25.4% 24.2% 28.3% 23.7% 23.8%

Service and other 13,885 17,624 23,818 31,939 42,604 53,425 5,160 5,822 6,210 6,626 6,960 7,553 8,329 9,097 9,529 10,827 10,654 11,595 • % Change Yr/Yr ----- 26.9% 35.1% 34.1% 33.4% 25.4% ------37.6% 34.9% 29.7% 34.1% 37.3% 36.9% 43.3% 27.9% 27.5% • % Change Q/Q ------7.1% 12.8% 6.7% 6.7% 5.0% 8.5% 10.3% 9.2% 4.7% 13.6% (1.6)% 8.8% • % Annual ------21.7% 24.4% 26.1% 27.8% 21.8% 23.6% 26.1% 28.5% 22.4% 25.4% 25.0% 27.2%

GAAP Total Revenue 86,833 93,580 85,320 92,664 104,128 111,480 20,379 23,796 20,531 20,614 20,453 24,090 23,630 24,492 24,414 28,229 25,218 26,267 • % Change Yr/Yr 11.5% 7.8% (8.8)% 8.6% 12.4% 7.1% (12.2)% (10.1)% (5.5)% (7.1)% 0.4% 1.2% 15.1% 18.8% 19.4% 17.2% 6.7% 7.2% • % Change Q/Q ------(8.1)% 16.8% (13.7)% 0.4% (0.8)% 17.8% (1.9)% 3.6% (0.3)% 15.6% (10.7)% 4.2% • % Annual ------23.9% 27.9% 24.1% 24.2% 22.1% 26.0% 25.5% 26.4% 23.4% 27.1% 24.2% 25.2%

Product % of GAAP Revenue 84.0% 81.2% 72.1% 65.5% 59.1% 52.1% 74.7% 75.5% 69.8% 67.9% 66.0% 68.6% 64.8% 62.9% 61.0% 61.6% 57.8% 55.9% Service and other % of GAAP Revenue 16.0% 18.8% 27.9% 34.5% 40.9% 47.9% 25.3% 24.5% 30.2% 32.1% 34.0% 31.4% 35.2% 37.1% 39.0% 38.4% 42.2% 44.1% Expenses Assumptions F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Product gross margin 77.1% 71.8% 70.9% 71.6% 72.2% 72.2% 73.5% 65.1% 73.5% 73.0% 73.5% 67.5% 72.5% 73.5% 74.0% 68.5% 73.0% 74.0% Service and other gross margin 25.1% 34.0% 37.4% 45.2% 51.2% 55.1% 38.5% 38.1% 36.9% 36.6% 38.8% 40.1% 50.0% 50.0% 48.0% 48.0% 53.0% 55.0% Gross Margin 69.0% 64.7% 64.5% 64.0% 63.6% 64.0% 66.7% 61.6% 65.0% 64.8% 64.9% 62.0% 64.6% 64.8% 63.9% 60.6% 64.6% 65.6% Research and development 13.1% 12.9% 13.0% 13.4% 12.8% 12.4% 13.7% 11.3% 13.5% 13.9% 13.9% 11.7% 14.0% 14.0% 14.0% 11.5% 13.0% 13.0% Sales and marketing 18.2% 16.8% 16.0% 16.2% 16.1% 15.9% 15.4% 15.4% 15.4% 17.7% 14.5% 15.6% 16.5% 18.0% 15.0% 15.4% 16.3% 17.8% General and administrative 5.6% 4.9% 5.0% 4.9% 4.5% 4.3% 5.0% 4.0% 5.2% 5.7% 4.7% 3.4% 5.7% 6.0% 5.0% 4.2% 4.5% 4.5% Stock Based Compensation 2.8% 2.8% 2.9% 3.0% 3.0% 3.0% 3.1% 2.6% 3.0% 2.9% 3.1% 2.9% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Depreciation and amortization 6.0% 6.4% 7.2% 8.8% 8.7% 8.5% 6.7% 6.0% 7.7% 8.4% 8.1% 8.3% 9.3% 9.3% 9.0% 8.0% 9.0% 9.0% Effective Tax Rate 19.0% 24.0% 18.8% 19.8% 20.0% 20.0% 20.8% 19.1% 24.4% 15.4% 16.9% 21.9% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Source: Credit Suisse estimates.

40 Michael Nemeroff | 212-325-2052 | [email protected] VIII. MSFT Financial Model Income Statement (Continued)

Microsoft F2016A F2017E F2018E F2019E PF Income Statement F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Amounts in US$millions, except per share data Jun '14 Jun '15 Jun '16 Jun '17 Jun '18 Jun '19 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Jun '18 Total Revenue 86,833 93,580 91,963 96,521 104,128 111,480 21,660 25,693 22,076 22,642 22,334 26,066 23,630 24,492 24,414 28,229 25,218 26,267 • % Change Yr/Yr 11.5% 7.8% (1.7)% 5.0% 7.9% 7.1% (6.6)% (2.9)% 1.6% 2.1% 3.1% 1.5% 7.0% 8.2% 9.3% 8.3% 6.7% 7.2% Cost of Product 16,681 21,410 17,880 17,246 17,099 16,134 4,035 6,268 3,801 3,776 3,581 5,378 4,208 4,080 3,870 5,482 3,932 3,815 Cost of Service and other 10,397 11,628 14,900 17,499 20,810 23,967 3,172 3,604 3,921 4,203 4,263 4,523 4,164 4,549 4,955 5,630 5,007 5,218 Total Cost of Revenue 26,934 33,038 32,780 34,745 37,909 40,101 7,207 9,872 7,722 7,979 7,844 9,901 8,372 8,628 8,825 11,112 8,940 9,032 • % Change Yr/Yr 39.2% 22.7% (0.8)% 6.0% 9.1% 5.8% (12.9)% (2.6)% 7.8% 6.8% 8.8% 0.3% 8.4% 8.1% 12.5% 12.2% 6.8% 4.7% Gross Profit 59,899 60,542 59,291 61,776 66,219 71,379 14,453 15,821 14,354 14,663 14,490 16,165 15,257 15,864 15,589 17,117 16,279 17,234 • Gross Margin % 69.0% 64.7% 64.5% 64.0% 63.6% 64.0% 66.7% 61.6% 65.0% 64.8% 64.9% 62.0% 64.6% 64.8% 63.9% 60.6% 64.6% 65.6%

Operating Expenses Research and development 11,381 12,046 11,988 12,905 13,357 13,858 2,962 2,900 2,980 3,146 3,106 3,062 3,308 3,429 3,418 3,246 3,278 3,415 Sales and marketing 15,811 15,713 14,697 15,611 16,801 17,767 3,333 3,960 3,406 3,998 3,233 4,071 3,899 4,409 3,662 4,352 4,111 4,676 General and administrative 4,821 4,611 4,563 4,740 4,723 4,834 1,084 1,038 1,140 1,301 1,045 879 1,347 1,470 1,221 1,186 1,135 1,182 Total Operating Expenses 32,013 32,370 31,248 33,257 34,881 36,459 7,379 7,898 7,526 8,445 7,384 8,012 8,554 9,307 8,301 8,784 8,524 9,272 • % Change Yr/Yr 3.8% 1.1% (3.5)% 6.4% 4.9% 4.5% (7.1)% (5.0)% (3.3)% 1.4% 0.1% 1.4% 13.7% 10.2% 12.4% 9.6% (0.4)% (0.4)%

Operating Income 27,886 28,172 27,935 28,519 31,338 34,920 7,074 7,923 6,828 6,218 7,106 8,153 6,704 6,557 7,288 8,333 7,755 7,962 • Operating Margin % 32.1% 30.1% 30.4% 29.5% 30.1% 31.3% 32.7% 30.8% 30.9% 27.5% 31.8% 31.3% 28.4% 26.8% 29.9% 29.5% 30.8% 30.3% • % Change Yr/Yr 0.7% 1.0% (0.8)% 2.1% 9.9% 11.4% 1.3% (1.2)% 0.6% (2.6)% 0.5% 2.9% (1.8)% 5.4% 2.6% 2.2% 15.7% 21.4%

Depreciation, amortization, and other 5,212 5,957 6,622 8,457 9,089 9,510 1,461 1,544 1,707 1,910 1,816 2,166 2,198 2,278 2,197 2,258 2,270 2,364 Adj. EBITDA 33,098 34,129 34,557 36,977 40,427 44,430 8,535 9,467 8,535 8,128 8,922 10,319 8,901 8,834 9,485 10,591 10,024 10,326 • Adj. EBITDA Margin % 38.1% 36.5% 37.6% 38.3% 38.8% 39.9% 39.4% 36.8% 38.7% 35.9% 39.9% 39.6% 37.7% 36.1% 38.9% 37.5% 39.8% 39.3% • % Change Yr/Yr 5.2% 3.1% 1.3% 7.0% 9.3% 9.9% 1.5% (0.8)% 2.8% 3.2% 4.5% 9.0% 4.3% 8.7% 6.3% 2.6% 12.6% 16.9%

Total Other (expense) income, net 61 346 (431) 586 400 400 (280) (171) (247) 267 100 186 150 150 100 100 100 100

Pro forma pretax income 27,947 28,518 27,504 29,105 31,738 35,320 6,794 7,752 6,581 6,485 7,206 8,339 6,854 6,707 7,388 8,433 7,855 8,062 • PTI Margin % 32.2% 30.5% 29.9% 30.2% 30.5% 31.7% 31.4% 30.2% 29.8% 28.6% 32.3% 32.0% 29.0% 27.4% 30.3% 29.9% 31.1% 30.7%

Income Taxes (benefit) 5,309 6,831 5,176 5,753 6,348 7,064 1,414 1,477 1,608 1,001 1,217 1,824 1,371 1,341 1,478 1,687 1,571 1,612

Pro forma Net Income 22,638 21,687 22,328 23,352 25,391 28,256 5,380 6,275 4,973 5,484 5,989 6,515 5,483 5,365 5,911 6,746 6,284 6,450 • Net Margin % 26.1% 23.2% 24.3% 24.2% 24.4% 25.3% 24.8% 24.4% 22.5% 24.2% 26.8% 25.0% 23.2% 21.9% 24.2% 23.9% 24.9% 24.6%

Shares Outstanding (basic) 8,299 8,176 7,924 7,738 7,602 7,466 7,996 7,964 7,895 7,842 7,789 7,755 7,721 7,687 7,653 7,619 7,585 7,551 Shares Outstanding (fully diluted) 8,385 8,256 8,002 7,807 7,623 7,439 8,066 8,028 7,985 7,929 7,876 7,830 7,784 7,738 7,692 7,646 7,600 7,554 Per Share Analysis F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Pro Forma EPS Fully Diluted $2.70 $2.63 $2.79 $2.99 $3.33 $3.80 $0.67 $0.78 $0.62 $0.69 $0.76 $0.83 $0.70 $0.69 $0.77 $0.88 $0.83 $0.85 • % Change Yr/Yr 0.9% (2.7)% 6.2% 7.2% 11.4% 14.0% (1.9)% 0.7% (0.9)% 11.1% 14.0% 6.5% 13.1% 0.3% 1.1% 6.0% 17.4% 23.1% • % Change Sequentially ------7.1% 17.2% (20.3)% 11.1% 9.9% 9.4% (15.3)% (1.6)% 10.8% 14.8% (6.3)% 3.3% Pro Forma EPS Fully Diluted (Excl. ESO) $2.94 $2.86 $3.06 $3.29 $3.66 $4.16 $0.73 $0.85 $0.69 $0.76 $0.83 $0.91 $0.78 $0.77 $0.84 $0.97 $0.91 $0.94 • % Change Yr/Yr 1.0% (2.5)% 6.9% 7.5% 11.2% 13.6% (1.3)% 1.4% (0.3)% 11.5% 13.8% 7.1% 13.2% 0.9% 1.2% 6.9% 16.6% 21.8% • % Change Sequentially ------7.3% 15.7% (19.1)% 11.1% 9.5% 8.9% (14.5)% (1.0)% 9.8% 15.0% (6.6)% 3.4% Reported EPS (GAAP) Fully Diluted $2.63 $1.48 $2.10 $2.74 $3.54 $4.04 $0.57 $0.62 $0.47 $0.39 $0.60 $0.66 $0.75 $0.74 $0.82 $0.94 $0.88 $0.91 • % Change Yr/Yr (2.4)% (43.9)% 42.1% 30.7% 29.0% 14.0% 5.4% (11.9)% (22.3)% Nmf 4.0% 6.7% 59.1% 87.1% 37.1% 41.2% 17.4% 23.1% • % Change Sequentially ------Nmf 8.7% (24.4)% (16.3)% 51.2% 11.5% 12.7% (1.6)% 10.8% 14.8% (6.3)% 3.3% Selected Metrics F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Days Sales Outstanding (DSO) 82 70 73 75 75 72 48 51 50 73 45 50 49 73 45 50 49 73 Net Cash 63,064 61,234 59,553 38,565 41,474 44,429 60,788 58,211 59,158 59,553 62,242 37,811 39,254 38,565 38,165 39,217 41,401 41,474 Net Cash / Share $7.52 $7.42 $7.44 $4.94 $5.44 $5.97 $7.54 $7.25 $7.41 $7.51 $7.90 $4.83 $5.04 $4.98 $4.96 $5.13 $5.45 $5.49 Book Value / Share (fully diluted) $10.71 $9.70 $9.00 $8.63 $8.75 $8.92 $9.60 $9.56 $9.37 $9.08 $8.93 $8.79 $8.76 $8.70 $8.70 $8.80 $8.81 $8.83 Unearned Revenue 25,158 25,318 33,909 41,250 46,647 51,312 24,387 25,031 25,893 33,909 33,588 34,680 35,752 41,250 37,969 39,230 40,447 46,647 Billings 89,592 93,740 100,554 103,862 109,526 116,145 20,729 26,337 22,938 30,658 22,013 27,158 24,701 29,990 21,133 29,490 26,435 32,468 • % Change Yr/Yr 11.7% 4.6% 7.3% 3.3% 5.5% 6.0% 0.7% 4.6% 10.9% 12.3% 6.2% 3.1% 7.7% (2.2)% (4.0)% 8.6% 7.0% 8.3%

Source: Credit Suisse estimates.

41 Michael Nemeroff | 212-325-2052 | [email protected] VIII. MSFT Financial Model Cash Flow Statement

Microsoft F2016A F2017E F2018E F2019E Cash Flow Statement F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Amounts in US$millions, except per share data Jun '14 Jun '15 Jun '16 Jun '17 Jun '18 Jun '19 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Jun '18 Operating Activities Net Income (GAAP) 22,074 12,193 16,778 21,417 26,978 30,022 4,902 4,998 3,756 3,122 4,690 5,200 5,826 5,701 6,280 7,168 6,677 6,853

Depreciation, amortization, and other 5,212 5,957 6,622 8,457 9,089 9,510 1,461 1,544 1,707 1,910 1,816 2,166 2,198 2,278 2,197 2,258 2,270 2,364 Stock-based compensation 2,446 2,574 2,668 2,914 3,124 3,344 674 658 672 664 703 767 709 735 732 847 757 788 Net recognized losses (gains) on investments (109) (443) (223) (963) - - 101 50 65 (439) (311) (652) ------Excess tax benefits from stock-based compensation (271) (524) (20) - - - - (20) ------Deferred income taxes (331) 224 (448) (572) - - 73 (247) 351 (625) 15 (587) ------Deferral of unearned revenue 44,325 45,072 57,072 26,724 - - 10,423 12,570 13,073 21,006 12,583 14,141 ------Recognition of unearned revenue (41,739) (44,920) (48,498) (26,549) - - (11,355) (11,929) (12,210) (13,004) (12,904) (13,645) ------Other - 7,498 630 ------630 ------Changes in working capital 624 1,513 (1,276) 6,592 4,163 4,242 2,597 (2,026) 2,953 (4,800) 4,957 (1,097) 2,398 335 225 725 2,764 448 Cash Flow from Operations 32,231 29,144 33,305 38,020 43,354 47,118 8,876 5,598 10,367 8,464 11,549 6,293 11,130 9,048 9,435 10,999 12,467 10,453 CFO / Share (diluted) $3.84 $3.53 $4.16 $4.87 $5.69 $6.33 $1.10 $0.70 $1.30 $1.07 $1.47 $0.80 $1.43 $1.17 $1.23 $1.44 $1.64 $1.38 • % Change Yr/Yr 11.8% (9.6)% 14.3% 14.2% 14.0% 8.7% 6.2% 29.0% 8.0% 23.6% 30.1% 12.4% 7.4% 6.9% (18.3)% 74.8% 12.0% 15.5%

Investing Activities Capital Expenditures (5,485) (5,944) (8,343) (9,151) (9,700) (10,462) (1,356) (2,024) (2,308) (2,655) (2,163) (1,988) (2,500) (2,500) (2,350) (2,350) (2,500) (2,500) Free Cash Flow 26,746 23,200 24,962 28,869 33,654 36,656 7,520 3,574 8,059 5,809 9,386 4,305 8,630 6,548 7,085 8,649 9,967 7,953 FCF / Share $3.19 $2.81 $3.12 $3.70 $4.41 $4.93 $0.93 $0.45 $1.01 $0.73 $1.19 $0.55 $1.11 $0.85 $0.92 $1.13 $1.31 $1.05 • % Change Yr/Yr 8.8% (13.3)% 7.6% 15.7% 16.6% 8.9% 6.3% 25.4% (1.8)% 14.6% 24.8% 20.5% 7.1% 12.7% (24.5)% 100.9% 15.5% 21.5%

Acquisitions, net of cash (5,937) (3,723) (1,393) (24,784) - - (390) (381) (559) (63) (24) (24,760) ------Purchases of investments (72,690) (98,729) (129,758) (103,956) - - (37,570) (34,750) (27,341) (30,097) (57,181) (46,775) ------Maturities of investments 5,272 15,013 22,054 17,374 - - 5,686 5,351 5,192 5,825 8,659 8,715 ------Sales of investments 60,094 70,848 93,287 81,310 - - 28,502 28,191 19,599 16,995 32,323 48,987 ------Securities lending payable (87) (466) 203 986 - - 62 285 (66) (78) (84) 1,070 ------Cash Flow from Investing (18,833) (23,001) (23,950) (38,221) (9,700) (10,462) (5,066) (3,328) (5,483) (10,073) (18,470) (14,751) (2,500) (2,500) (2,350) (2,350) (2,500) (2,500)

Financing Activities Proceeds (repayments) of short-term debt, net 500 4,481 7,195 (7,145) - - 4,890 (7,031) 2,622 6,714 (3,390) (3,755) ------Proceeds from debt, maturities longer than 90 days 10,350 10,680 13,884 42,046 - - 121 13,128 25 610 24,977 17,069 ------Repayments of debt, maturities longer than 90 days (3,888) (1,500) (2,796) (4,343) - - (1,750) (121) (900) (25) (225) (4,118) ------Common stock issued 607 634 668 372 - - 219 117 159 173 241 131 ------Common stock repurchased (7,316) (14,443) (15,969) (16,376) (17,974) (20,262) (4,757) (3,678) (3,857) (3,677) (4,362) (3,599) (4,176) (4,239) (4,270) (4,396) (4,598) (4,709) Common stock cash dividends paid (8,879) (9,882) (11,006) (11,833) (12,771) (13,439) (2,475) (2,868) (2,842) (2,821) (2,800) (3,024) (3,011) (2,998) (3,214) (3,200) (3,186) (3,171) Excess tax benefits from stock-based compensation 271 524 20 - - - - 20 ------Other (39) 362 (369) 200 - - (178) (65) (123) (3) (112) 312 ------Cash Flow from Financing (8,394) (9,144) (8,373) 2,920 (30,745) (33,701) (3,930) (498) (4,916) 971 14,329 3,016 (7,187) (7,237) (7,484) (7,596) (7,783) (7,881) Foreign currency exchange rate impact on cash (139) (73) (67) (8) - - (44) (18) 17 (22) 10 (18) ------Net Increase in Cash and Cash Equivalents 4,865 (3,074) 915 2,712 2,909 2,956 (164) 1,754 (15) (660) 7,418 (5,460) 1,443 (689) (400) 1,052 2,184 73 Cash and Cash Equivalents, beginning of period 3,804 8,669 5,595 6,510 9,222 12,131 5,595 5,431 7,185 7,170 6,510 13,928 8,468 9,911 9,222 8,822 9,874 12,058 Cash and Cash Equivalents, end of period 8,669 5,595 6,510 9,222 12,131 15,086 5,431 7,185 7,170 6,510 13,928 8,468 9,911 9,222 8,822 9,874 12,058 12,131

Source: Credit Suisse estimates.

42 Michael Nemeroff | 212-325-2052 | [email protected] VIII. MSFT Financial Model Balance Sheet

Microsoft F2016A F2017E F2018E F2019E Balance Sheet F2014A F2015A F2016A F2017E F2018E F2019E Q1A Q2A Q3A Q4A Q1A Q2A Q3E Q4E Q1E Q2E Q3E Q4E Amounts in US$millions, except per share data Jun '14 Jun '15 Jun '16 Jun '17 Jun '18 Jun '19 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Jun '18 Cash and cash equivalents 8,669 5,595 6,510 9,222 12,131 15,086 5,431 7,185 7,170 6,510 13,928 8,468 9,911 9,222 8,822 9,874 12,058 12,131 Short-term investments 77,040 90,931 106,730 114,313 114,313 114,313 93,924 95,455 98,382 106,730 123,004 114,313 114,313 114,313 114,313 114,313 114,313 114,313 Accounts receivable, net 19,544 17,908 18,277 19,865 21,305 21,976 11,444 14,507 12,247 18,277 11,129 14,343 12,865 19,865 12,207 15,683 13,730 21,305 Inventories 2,660 2,902 2,251 2,397 2,509 2,643 3,816 2,702 2,450 2,251 3,122 1,961 2,326 2,397 3,530 2,222 2,483 2,509 Deferred incomes taxes 1,941 1,915 - - - - 1,447 1,618 1,574 ------Other current assets 4,392 5,461 5,892 6,187 6,496 6,821 5,594 6,345 6,598 5,892 6,726 5,864 6,928 6,187 7,062 6,157 7,274 6,496 Total current assets 114,246 124,712 139,660 151,983 156,753 160,839 121,656 127,812 128,421 139,660 157,909 144,949 146,343 151,983 145,934 148,249 149,858 156,753

Property and equipment, net 13,011 14,731 18,356 21,904 22,514 23,467 15,046 15,789 16,831 18,356 19,224 21,379 21,681 21,904 22,056 22,148 22,379 22,514 Equity and other investments 14,597 12,053 10,431 8,912 8,912 8,912 11,438 11,514 11,315 10,431 10,486 8,912 8,912 8,912 8,912 8,912 8,912 8,912 Goodw ill 20,127 16,939 17,872 34,524 34,524 34,524 17,142 17,436 17,948 17,872 17,907 34,524 34,524 34,524 34,524 34,524 34,524 34,524 Intangible assets, net 6,981 4,835 3,733 11,001 11,001 11,001 4,745 4,619 4,459 3,733 3,522 11,001 11,001 11,001 11,001 11,001 11,001 11,001 Deferred incomes taxes ------Other long-term assets 3,422 2,953 3,642 3,845 3,845 3,845 2,869 2,928 2,895 3,642 3,476 3,845 3,845 3,845 3,845 3,845 3,845 3,845 Total assets 172,384 176,223 193,694 232,169 237,550 242,587 172,896 180,098 181,869 193,694 212,524 224,610 226,306 232,169 226,273 228,680 230,519 237,550

Liabilities Accounts payable 7,432 6,591 6,898 7,478 7,828 8,245 6,630 6,936 6,759 6,898 6,296 6,580 7,349 7,478 7,060 7,408 7,847 7,828 Short-term debt 2,000 7,484 12,904 25,664 25,664 25,664 10,748 3,750 5,498 12,904 14,536 25,664 25,664 25,664 25,664 25,664 25,664 25,664 Accrued compensation 4,797 5,096 5,264 5,527 5,804 6,094 3,450 3,649 4,276 5,264 3,621 3,982 4,490 5,527 3,802 4,181 4,714 5,804 Income taxes 782 606 580 508 508 508 607 493 685 580 720 508 508 508 508 508 508 508 Short-term unearned revenue 23,150 23,223 27,468 31,588 35,537 39,090 21,603 20,929 20,876 27,468 26,304 26,085 26,721 31,588 29,592 29,346 30,061 35,537 Other 7,464 6,858 6,243 7,968 7,968 7,968 6,361 6,886 6,260 6,243 7,333 7,968 7,968 7,968 7,968 7,968 7,968 7,968 Total current liabilities 45,625 49,858 59,357 78,733 83,308 87,569 49,399 42,643 44,354 59,357 58,810 70,787 72,700 78,733 74,594 75,075 76,763 83,308

Long-term debt 20,645 27,808 40,783 59,306 59,306 59,306 27,819 40,679 40,896 40,783 60,154 59,306 59,306 59,306 59,306 59,306 59,306 59,306 Long-term unearned revenue 2,008 2,095 6,441 9,662 11,111 12,222 2,784 4,102 5,017 6,441 7,284 8,595 9,031 9,662 8,377 9,884 10,385 11,111 Deferred income taxes 2,728 2,835 696 1,133 1,133 1,133 2,169 2,194 2,674 696 1,564 1,133 1,133 1,133 1,133 1,133 1,133 1,133 Other long-term liabilities 11,594 13,544 14,420 15,980 15,980 15,980 13,280 13,700 14,122 14,420 14,340 15,980 15,980 15,980 15,980 15,980 15,980 15,980 Total liabilities 82,600 96,140 121,697 164,814 170,838 176,210 95,451 103,318 107,063 121,697 142,152 155,801 158,150 164,814 159,390 161,378 163,567 170,838 Total stockholders' equity 89,784 80,083 71,997 67,355 66,712 66,378 77,445 76,780 74,806 71,997 70,372 68,809 68,157 67,355 66,883 67,302 66,952 66,712

Total liabilities and stockholders' equity 172,384 176,223 193,694 232,169 237,550 242,587 172,896 180,098 181,869 193,694 212,524 224,610 226,306 232,169 226,273 228,680 230,519 237,550

Source: Credit Suisse estimates.

43 Michael Nemeroff | 212-325-2052 | [email protected] IX. Appendix

44 Michael Nemeroff | 212-325-2052 | [email protected] MSFT Executives

Satya Nadella—Chief Executive Officer Mr. Nadella was appointed CEO in February 2014. Prior to that, he served as EVP – Cloud and Enterprises since July 2013, as president – Server and Tools from 2011 to 2013, and as SVP – Online Services Division from 2009 to 2011. He joined Microsoft in 1992 and holds a B.S. in Electrical Engineering from Mangalore University, a M.S. in computer science from University of Wisconsin: Milwaukee, and an M.B.A. from University of Chicago. Amy Hood—EVP, Chief Financial Officer Ms. Hood was appointed CFO in May 2013. Previously, she served as CFO – Microsoft Business Division beginning in 2010, and as general manager – Microsoft Business Division Strategy from 2006 through 2009. Prior to joining Microsoft in 2002, she worked at Goldman Sachs in various investment banking and capital markets groups roles. She holds a B.S. in economics from Duke University, and an M.B.A. from Harvard University. Christopher Capossela—EVP, Chief Marketing Officer Mr. Capossela was appointed CMO in March 2014. Prior to that, he served as the leader of the Consumer Channels Group and held a variety of marketing leadership roles in the Microsoft Office Division for >20 years. He holds a B.S. in computer science and economics from Harvard University. Jean-Philippe Courtois—EVP and President, Microsoft Global Sales, Marketing and Operations Mr. Courtois was appointed EVP & president – Microsoft Global Sales, Marketing and Operations in July 2016. Prior to that, he served as PRESIDENT of Microsoft International since June 2005, as CEO – Microsoft EMEA since March 2003, and as SVP & president – Microsoft EMEA since July 2000. He holds a DECS from the Ecole Superieure de Commerce, Nice (SKEMA). Kathleen Hogan—EVP, Human Resources Ms. Hogan was appointed EVP – Human Resources in November 2014. Previously, she served as corporate VP of Microsoft Services and as corporate VP of Customer Service and Support. She holds a B.S. in applied mathematics and economics from Harvard University and an M.B.A from Stanford Univ. Margaret (Peggy) Johnson—EVP, Business Development Ms. Johnson was appointed EVP – Business Development in September 2014. Prior to that, she held various leadership positions across engineering, sales, marketing, and business development in Qualcomm for 24 years. She holds a B.S. in electrical engineering from San Diego State University. Bradford Smith—President, Chief Legal Officer Mr. Smith was appointed president and chief legal officer in September 2015. Previously, he served as EVP – General Counsel and Secretary since 2011, and as SVP – General Counsel and Secretary from 2001 to 2011. He holds a B.S. in international relations and economics from Princeton University and a J.D. from Columbia University. We believe MSFT executives’ interests are closely aligned with shareholders as they receive restricted shares/options as a form of their comp package.

Source: Company data, SEC filings.

45 Michael Nemeroff | 212-325-2052 | [email protected] Company Overview Product Segment Mapping

Source: Company data, Credit Suisse.

46 Michael Nemeroff | 212-325-2052 | [email protected] On-Premise (In-House Servers) vs. Public Cloud (Outsourced)

TCO (Total Cost of Ownership) Calculator: On-premises vs. Microsoft Azure Scenario Analysis

Source: Company data, Microsoft (https://azure.microsoft.com), Credit Suisse.

47 Michael Nemeroff | 212-325-2052 | [email protected] Coverage Universe/Estimate Summary

Software Quarterly Estimates Comparison w/ Consensus and Guidance Current Quarter Current Quarter (in millions except per share data) Revenue EPS CFO Current Quarter Variance Ticker Rating Target Price Period Quarter End CS Rev Cons Rev Guide Rev CS EPS Cons EPS Guide EPS CS CFO Cons CFO DCF (50% Wt) CS Target Multiple Valuation (50% Wt) ADBE OUTPERFORM $150 F2Q17 May $1,730.9 $1,732.9 ~$1,730 $0.94 $0.95 ~$0.94 $550.6 $554.2 $150 ~27.3x F2017E EV/OCF Multiple = $150 ADSK OUTPERFORM $115 F1Q18 Apr $469.8 $470.4 $460-$480 ($0.24) ($0.24) ($0.21)-($0.27) $141.8 $148.5 $114 ~38.4x C2018E EV / Free Cash Flow = $115 ALRM OUTPERFORM $37 1Q17 Mar $71.7 $69.9 $0.15 $0.15 ($3.6) $5.8 $37 ~5.5x 2017E EV / Revenue Multiple APPF NEUTRAL $25 1Q17 Mar $30.6 $30.6 ($0.04) ($0.02) $0.8 $0.2 $25 ~5.9x 2017E EV / Revenue Multiple CA NEUTRAL $34 F4Q17 Mar $997.8 $995.5 $0.49 $0.49 $392.0 $383.8 $34 ~14.2x C2017E P/E Multiple = $34 CALD OUTPERFORM $27 1Q17 Mar $56.9 $56.9 $56.4-$57.4 $0.05 $0.06 $7.7 $7.7 $28 ~6.5x 2017E EV / Revenue Multiple CRM OUTPERFORM $110 F1Q18 Apr $2,348.2 $2,348.9 $2,340-$2,350 $0.26 $0.26 $0.25-$0.26 $1,130.1 $1,148.9 $110 ~23.6x C2018E EV / OCF = $110 CSOD NEUTRAL $43 1Q17 Mar $110.0 $110.6 $109.0-$111.0 ($0.03) ($0.01) ($3.3) ($8.1) $42 ~4.8x 2017E EV / Revenue Multiple = $43 EVBG OUTPERFORM $24 1Q17 Mar $22.1 $22.1 $22.0-$22.2 ($0.19) ($0.18) ($0.18)-($0.19) ($1.5) ($3.0) $23 ~6.4x 2017E EV / Revenue Multiple INTU OUTPERFORM $140 F3Q17 Apr $2,524.9 $2,498.5 $2,500-$2,550 $3.88 $3.86 $3.85-$3.90 $1,564.1 $1,449.1 $140 ~29.9x Jan '18 P/E Multiple MB OUTPERFORM $27 1Q17 Mar $42.1 $42.1 $41.5-$42.5 ($0.04) ($0.04) ($0.03)-($0.05) $0.2 $0.0 $27 ~6.0x 2017E EV / Revenue Multiple MSFT OUTPERFORM $80 F3Q17 Mar $23,629.5 $23,622.5 $23,150-$23,850 $0.70 $0.70 $11,130.2 $9,887.2 $80 ~20.6x Dec '18 P/E Multiple OOMA OUTPERFORM $16 F1Q18 Apr $28.1 $28.1 $27.8-$28.4 ($0.03) ($0.03) ($0.04)-($0.07) ($0.3) $0.6 $16 ~2.0x C2017 EV / Revenue Multiple PAYC OUTPERFORM $56 1Q17 Mar $115.9 $115.8 $114.5-$116.5 $0.42 $0.41 $28.0 $34.2 $56 ~7.7x 2017E EV / Revenue Multiple SHOP OUTPERFORM $70 1Q17 Mar $121.8 $121.6 $120.0-$122.0 ($0.10) ($0.10) ($0.9) $0.1 $70 ~11.2x 2017E EV / Revenue Multiple SNCR OUTPERFORM $45 1Q17 Mar $175.5 $175.8 $173-$178 $0.41 $0.40 $0.39-$0.43 $20.9 $41.1 $45 ~3.4x 2017E EV / Revenue Multiple = $45 TWOU OUTPERFORM $54 1Q17 Mar $63.9 $63.9 $63.6-$64.0 $0.01 $0.01 $0.00-$0.01 $9.6 $6.3 $54 ~7.5x 2018E EV / Revenue Multiple ULTI OUTPERFORM $260 2Q17 Jun $228.0 $228.0 ~$228 $0.90 $0.91 $35.5 $35.5 $261 ~8.1x 2017E EV / Revenue Multiple = $260 VRNT UNDERPERFORM $37 F1Q18 Apr $260.0 $259.7 ~$260 $0.39 $0.38 $41.9 $42.4 $37 ~13.7x F2018E P/E Multiple WDAY NEUTRAL $91 F1Q18 Apr $467.4 $467.3 $467-$468 $0.17 $0.16 $168.1 $165.1 $91 ~7.0x C2018E EV / Revenue Multiple WK NEUTRAL $16 1Q17 Mar $50.5 $50.7 $50.3-$50.7 ($0.15) ($0.15) ($0.14)-($0.15) ($7.3) ($5.3) $16 ~3.0x 2017E EV / Revenue Multiple Next Quarter Next Quarter (in millions except per share data) Revenue EPS CFO Next Quarter Variance Ticker Rating Target Price Period Quarter End CS Rev Cons Rev Guide Rev CS EPS Cons EPS Guide EPS CS CFO Cons CFO DCF (50% Wt) CS Target Multiple Valuation (50% Wt) ADBE OUTPERFORM $150 F3Q17 Aug $1,798.9 $1,800.6 $0.96 $0.97 $587.9 $595.7 $150 ~27.3x F2017E EV/OCF Multiple = $150 ADSK OUTPERFORM $115 F2Q18 Jul $491.4 $487.8 ($0.15) ($0.15) ($11.2) $0.9 $114 ~38.4x C2018E EV / Free Cash Flow = $115 ALRM OUTPERFORM $37 2Q17 Jun $80.7 $80.6 $0.18 $0.18 $19.4 $6.0 $37 ~5.5x 2017E EV / Revenue Multiple APPF NEUTRAL $25 2Q17 Jun $34.3 $34.2 $0.00 $0.00 $4.6 $0.0 $25 ~5.9x 2017E EV / Revenue Multiple CA NEUTRAL $34 F1Q18 Jun $992.6 $986.1 $0.60 $0.60 $219.3 $145.6 $34 ~14.2x C2017E P/E Multiple = $34 CALD OUTPERFORM $27 2Q17 Jun $59.0 $58.9 $0.07 $0.07 $9.0 $0.8 $28 ~6.5x 2017E EV / Revenue Multiple CRM OUTPERFORM $110 F2Q18 Jul $2,484.7 $2,481.8 $0.31 $0.31 $334.7 $410.6 $110 ~23.6x C2018E EV / OCF = $110 CSOD NEUTRAL $43 2Q17 Jun $116.9 $119.2 $0.06 $0.07 ($2.1) $3.5 $42 ~4.8x 2017E EV / Revenue Multiple = $43 EVBG OUTPERFORM $24 2Q17 Jun $24.1 $24.2 ($0.07) ($0.09) ($4.3) ($2.9) $23 ~6.4x 2017E EV / Revenue Multiple INTU OUTPERFORM $140 F4Q17 Jul $761.1 $776.5 $0.20 $0.15 ($50.4) $476.0 $140 ~29.9x Jan '18 P/E Multiple MB OUTPERFORM $27 2Q17 Jun $43.7 $44.0 ($0.04) ($0.04) $0.7 $0.9 $27 ~6.0x 2017E EV / Revenue Multiple MSFT OUTPERFORM $80 F4Q17 Jun $24,491.7 $24,516.1 $0.69 $0.68 $9,048.0 $8,961.8 $80 ~20.6x Dec '18 P/E Multiple OOMA OUTPERFORM $16 F2Q18 Jul $29.5 $29.6 ($0.03) ($0.03) $0.4 $0.6 $16 ~2.0x C2017 EV / Revenue Multiple PAYC OUTPERFORM $56 2Q17 Jun $94.6 $94.7 $0.24 $0.22 $27.2 $23.7 $56 ~7.7x 2017E EV / Revenue Multiple SHOP OUTPERFORM $70 2Q17 Jun $135.5 $136.9 ($0.08) ($0.07) $7.2 $4.4 $70 ~11.2x 2017E EV / Revenue Multiple SNCR OUTPERFORM $45 2Q17 Jun $200.7 $200.3 $0.61 $0.61 $47.0 $21.6 $45 ~3.4x 2017E EV / Revenue Multiple = $45 TWOU OUTPERFORM $54 2Q17 Jun $64.3 $64.4 ($0.13) ($0.11) $10.2 $5.9 $54 ~7.5x 2018E EV / Revenue Multiple ULTI OUTPERFORM $260 3Q17 Sep $245.1 $245.5 $1.03 $1.07 $58.7 $58.4 $261 ~8.1x 2017E EV / Revenue Multiple = $260 VRNT UNDERPERFORM $37 F2Q18 Jul $270.0 $269.8 $0.51 $0.53 $18.2 $16.7 $37 ~13.7x F2018E P/E Multiple WDAY NEUTRAL $91 F2Q18 Jul $491.0 $491.4 $0.11 $0.11 $37.1 $35.4 $91 ~7.0x C2018E EV / Revenue Multiple WK NEUTRAL $16 2Q17 Jun $48.8 $49.5 ($0.20) ($0.20) $1.7 ($1.5) $16 ~3.0x 2017E EV / Revenue Multiple Note: EPS excludes stock option compensation and amortization of intangibles unless otherw ise noted

Source: Thomson Reuters, Company Data, Credit Suisse estimates. 48 Coverage Universe/Estimate Summary

Software Annual Estimates Comparison w/ Consensus and Guidance Current Year Current Year (in millions except per share data) Revenue EPS CFO Current Year Variance Ticker Rating Target Price Period Year End CS Rev Cons Rev Guide Rev CS EPS Cons EPS Guide EPS CS CFO Cons CFO DCF (50% Wt) CS Target Multiple Valuation (50% Wt) ADBE OUTPERFORM $150 F2017 Nov $7,161.2 $7,164.8 $3.92 $3.95 $2,647.5 $2,670.8 $150 ~27.3x F2017E EV/OCF Multiple = $150 ADSK OUTPERFORM $115 F2018 Jan $2,036.5 $2,024.1 $2,000-$2,050 ($0.59) ($0.60) ($0.56)-($0.73) $162.4 $161.1 $114 ~38.4x C2018E EV / Free Cash Flow = $115 ALRM OUTPERFORM $37 2017 Dec $323.8 $324.0 $322.0-$325.5 $0.74 $0.74 $0.73-$0.75 $37.8 $23.8 $37 ~5.5x 2017E EV / Revenue Multiple APPF NEUTRAL $25 2017 Dec $137.5 $137.3 $136.0-$138.0 $0.00 $0.03 $14.6 $14.0 $25 ~5.9x 2017E EV / Revenue Multiple CA NEUTRAL $34 F2017 Mar $4,021.8 $4,019.9 $4,010-$4,030 $2.46 $2.44 $2.42-$2.47 $1,012.0 $964.0 $34 ~14.2x C2017E P/E Multiple = $34 CALD OUTPERFORM $27 2017 Dec $243.5 $244.0 $240.5-$246.5 $0.31 $0.31 $48.0 $36.3 $28 ~6.5x 2017E EV / Revenue Multiple CRM OUTPERFORM $110 F2018 Jan $10,187.3 $10,185.8 $10,150-$10,200 $1.28 $1.29 $1.27-$1.29 $2,599.7 $2,592.4 $110 ~23.6x C2018E EV / OCF = $110 CSOD NEUTRAL $43 2017 Dec $480.0 $481.7 $475.0-$485.0 $0.35 $0.36 $57.6 $60.7 $42 ~4.8x 2017E EV / Revenue Multiple = $43 EVBG OUTPERFORM $24 2017 Dec $100.5 $100.7 $100.0-$101.0 ($0.31) ($0.32) ($0.30)-($0.33) $6.7 $8.1 $23 ~6.4x 2017E EV / Revenue Multiple INTU OUTPERFORM $140 F2017 Jul $5,080.1 $5,065.2 $5,000-$5,100 $4.38 $4.33 $4.30-$4.40 $1,600.7 $1,753.0 $140 ~29.9x Jan '18 P/E Multiple MB OUTPERFORM $27 2017 Dec $180.5 $180.7 $179.0-$182.0 ($0.10) ($0.11) ($0.06)-($0.14) $5.6 $4.8 $27 ~6.0x 2017E EV / Revenue Multiple MSFT OUTPERFORM $80 F2017 Jun $96,521.2 $96,605.2 $2.99 $2.97 $38,020.2 $36,480.1 $80 ~20.6x Dec '18 P/E Multiple OOMA OUTPERFORM $16 F2018 Jan $122.5 $122.5 $121.0-$124.0 ($0.11) ($0.11) ($0.08)-($0.13) $1.7 $1.7 $16 ~2.0x C2017 EV / Revenue Multiple PAYC OUTPERFORM $56 2017 Dec $425.5 $423.2 $422.0-$424.0 $1.02 $1.02 $106.4 $109.5 $56 ~7.7x 2017E EV / Revenue Multiple SHOP OUTPERFORM $70 2017 Dec $604.7 $599.5 $580.0-$600.0 ($0.19) ($0.18) $30.7 $25.4 $70 ~11.2x 2017E EV / Revenue Multiple SNCR OUTPERFORM $45 2017 Dec $815.9 $814.8 $810.0-$820.0 $2.53 $2.55 $2.45-$2.60 $174.6 $141.1 $45 ~3.4x 2017E EV / Revenue Multiple = $45 TWOU OUTPERFORM $54 2017 Dec $269.2 $269.5 $267.6-$269.8 ($0.13) ($0.12) ($0.11)-($0.15) $24.1 $15.2 $54 ~7.5x 2018E EV / Revenue Multiple ULTI OUTPERFORM $260 2017 Dec $971.3 $967.6 implied $968.8 $4.00 $3.98 $194.0 $198.6 $261 ~8.1x 2017E EV / Revenue Multiple = $260 VRNT UNDERPERFORM $37 F2018 Jan $1,140.0 $1,137.2 ~$1,140 $2.70 $2.71 ~$2.70 $192.2 $196.1 $37 ~13.7x F2018E P/E Multiple WDAY NEUTRAL $91 F2018 Jan $2,022.5 $2,022.7 $2,005-$2,025 $0.52 $0.51 $421.4 $422.8 $91 ~7.0x C2018E EV / Revenue Multiple WK NEUTRAL $16 2017 Dec $204.5 $204.6 $203.0-$206.0 ($0.76) ($0.76) ($0.72)-($0.80) $0.6 $4.1 $16 ~3.0x 2017E EV / Revenue Multiple Next Year Next Year (in millions except per share data) Revenue EPS CFO Next Year Variance Ticker Rating Target Price Period Year End CS Rev Cons Rev Guide Rev CS EPS Cons EPS Guide EPS CS CFO Cons CFO DCF (50% Wt) CS Target Multiple Valuation (50% Wt) ADBE OUTPERFORM $150 F2018 Nov $8,517.9 $8,547.3 $4.90 $4.98 $3,219.3 $3,173.2 $150 ~27.3x F2017E EV/OCF Multiple = $150 ADSK OUTPERFORM $115 F2019 Jan $2,635.5 $2,543.3 $1.35 $1.17 $734.1 $713.6 $114 ~38.4x C2018E EV / Free Cash Flow = $115 ALRM OUTPERFORM $37 2018 Dec $374.7 $373.8 $0.87 $0.89 $47.6 $39.5 $37 ~5.5x 2017E EV / Revenue Multiple APPF NEUTRAL $25 2018 Dec $173.0 $173.3 $0.15 $0.23 $21.3 $2.2 $25 ~5.9x 2017E EV / Revenue Multiple CA NEUTRAL $34 F2018 Mar $4,030.4 $4,021.3 $2.54 $2.46 $1,033.9 $1,062.2 $34 ~14.2x C2017E P/E Multiple = $34 CALD OUTPERFORM $27 2018 Dec $290.6 $288.7 $0.39 $0.41 $58.6 $46.4 $28 ~6.5x 2017E EV / Revenue Multiple CRM OUTPERFORM $110 F2019 Jan $12,166.3 $12,162.5 $1.73 $1.68 $3,262.8 $3,121.9 $110 ~23.6x C2018E EV / OCF = $110 CSOD NEUTRAL $43 2018 Dec $547.4 $556.5 $0.90 $0.76 $111.7 $95.6 $42 ~4.8x 2017E EV / Revenue Multiple = $43 EVBG OUTPERFORM $24 2018 Dec $126.6 $125.3 ($0.24) ($0.24) $12.8 $12.8 $23 ~6.4x 2017E EV / Revenue Multiple INTU OUTPERFORM $140 F2018 Jul $5,490.3 $5,486.5 $5.03 $4.94 $1,759.6 $1,694.5 $140 ~29.9x Jan '18 P/E Multiple MB OUTPERFORM $27 2018 Dec $227.0 $226.7 $0.16 $0.17 $18.1 $19.0 $27 ~6.0x 2017E EV / Revenue Multiple MSFT OUTPERFORM $80 F2018 Jun $104,128.1 $104,142.1 $3.33 $3.27 $43,353.9 $39,466.2 $80 ~20.6x Dec '18 P/E Multiple OOMA OUTPERFORM $16 F2019 Jan $145.0 $145.7 $0.10 $0.15 $5.3 $8.7 $16 ~2.0x C2017 EV / Revenue Multiple PAYC OUTPERFORM $56 2018 Dec $534.0 $527.1 $1.36 $1.34 $136.4 $132.1 $56 ~7.7x 2017E EV / Revenue Multiple SHOP OUTPERFORM $70 2018 Dec $810.4 $820.8 $0.15 $0.12 $63.5 $55.6 $70 ~11.2x 2017E EV / Revenue Multiple SNCR OUTPERFORM $45 2018 Dec $1,000.3 $967.9 $3.45 $3.30 $197.9 $205.8 $45 ~3.4x 2017E EV / Revenue Multiple = $45 TWOU OUTPERFORM $54 2018 Dec $350.4 $351.2 ($0.03) ($0.04) $25.2 $27.0 $54 ~7.5x 2018E EV / Revenue Multiple ULTI OUTPERFORM $260 2018 Dec $1,188.7 $1,177.6 $4.96 $4.93 $236.9 $238.6 $261 ~8.1x 2017E EV / Revenue Multiple = $260 VRNT UNDERPERFORM $37 F2019 Jan $1,212.5 $1,212.5 $3.05 $3.06 $210.2 $222.5 $37 ~13.7x F2018E P/E Multiple WDAY NEUTRAL $91 F2019 Jan $2,532.0 $2,532.2 $0.82 $0.82 $539.5 $538.0 $91 ~7.0x C2018E EV / Revenue Multiple WK NEUTRAL $16 2018 Dec $238.3 $235.7 ($0.52) ($0.50) $1.8 $10.9 $16 ~3.0x 2017E EV / Revenue Multiple Note: EPS excludes stock option compensation and amortization of intangibles unless otherw ise noted

Source: Thomson Reuters, Company Data, Credit Suisse estimates. 49 Disclosures

50 Companies Mentioned (Price as of 25-Apr-2017) 2U, Inc (TWOU.OQ, $43.64) Adobe Systems Inc. (ADBE.OQ, $133.49) Akamai Technologies Inc. (AKAM.OQ, $61.8) Alarm.com Holdings Inc. (ALRM.OQ, $32.53) Amdocs (DOX.OQ, $61.24) AppFolio Inc. (APPF.OQ, $26.4) Apple Inc (AAPL.OQ, $144.53) Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company Autodesk Inc. (ADSK.OQ, $90.32) at this time. CA Inc. (CA.OQ, $32.6) Callidus Software Inc. (CALD.OQ, $20.75) Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view Check Point Software Technologies Ltd. (CHKP.OQ, $105.36) on the equity security of the company or related products. Cisco Systems Inc. (CSCO.OQ, $33.42) Citrix Systems Inc. (CTXS.OQ, $84.05) Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 Cornerstone OnDemand, Inc. (CSOD.OQ, $38.18) months or the analyst expects significant volatility going forward. Everbridge, Inc. (EVBG.OQ, $23.24) International Business Machines Corp. (IBM.N, $160.39) Intuit Inc. (INTU.OQ, $119.08) Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of Microsoft (MSFT.OQ, $67.92, OUTPERFORM, TP $80.0) the sector* relative to the group’s historic fundamentals and/or valuation: Mindbody Inc. (MB.OQ, $28.1) Ooma Inc. (OOMA.N, $12.0) Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Open Text Corporation (OTEX.OQ, $34.89) Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Oracle Corporation (ORCL.N, $44.72) Paycom Software, Inc. (PAYC.N, $60.5) Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. Red Hat, Inc. (RHT.N, $87.59) SAP (SAPG.F, €93.24) *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Salesforce.com (CRM.N, $84.75) Shopify Inc. (SHOP.N, $76.65) Credit Suisse's distribution of stock ratings (and banking clients) is: Symantec Corporation (SYMC.OQ, $31.25) Synchronoss Technologies, Inc. (SNCR.OQ, $24.64) Global Ratings Distribution The Ultimate Software Group, Inc. (ULTI.OQ, $210.91) VeriSign Inc. (VRSN.OQ, $89.28) Rating Versus universe (%) Of which banking clients (%) Verint Systems Inc. (VRNT.OQ, $40.05) Workday Inc (WDAY.N, $86.87) Outperform/Buy* 45% (64% banking clients) Workiva, Inc. (WK.N, $16.8) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond Disclosure Appendix to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Analyst Certification Important Global Disclosures I, Michael Nemeroff, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products report. may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the 3-Year Price and Rating History for Microsoft (MSFT.OQ) frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market MSFT.OQ Closing Price Target Price that may have a material impact on the research views or opinions stated herein. Date (US$) (US$) Rating Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to 25-Apr-14 39.91 47.50 O Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers- 23-Jul-14 44.87 50.00 ib/en/managing-conflicts.html . 24-Oct-14 46.13 55.00 Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be 23-Oct-15 52.87 60.00 used, by any taxpayer for the purposes of avoiding any penalties. 29-Jan-16 55.09 62.50 07-Jul-16 51.38 NC Target Price and Rating Valuation Methodology and Risks: (12 months) for Microsoft (MSFT.OQ) * Asterisk signifies initiation or assumption of coverage. Effective July 3, 2016, NC denotes termination of coverage. Method: Our $80 target price for MSFT is the average of our discounted cash flow (DCF) and relative comparable multiple to its peers. For our DCF, OUTPERFORM we use a weighted average cost of capital (WACC) of 10.9% and 3% terminal growth rate. This valuation is supported by a 20.6 times price NOT COVERED to estimated earnings multiple using our C2018 (excluding stock-based compensation) estimate (P/E). We believe that this target price and multiple are warranted, given our expectations for sustained growth in Commercial Cloud while generating incremental leverage. In addition, The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total we believe that as more of MSFT’s revenue stems from recurring sources (e.g., subscription / transactional revenue), this could lead to revenues, a portion of which are generated by Credit Suisse's investment banking activities further multiple expansion.

As of December 10, 2012 Analysts’ stock rating are defined as follows: Risk: The risk factors that could impede achievement of our $80 target price and cause us to change our Outperform rating: (1) competitive Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. landscape, (2) acquisitions and potential impairment of goodwill / intangibles, (3) macroeconomic uncertainty, (4) server outages and disruption to online services, (5) cyber-attacks and security vulnerabilities, and (6) piracy / protecting intellectual property rights. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which used in the target price method and risk sections. consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and See the Companies Mentioned section for full company names Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most The subject company (MSFT.OQ, EVBG.OQ, OOMA.N, ADBE.OQ, SNCR.OQ, TWOU.OQ, VRNT.OQ, ALRM.OQ, CA.OQ, INTU.OQ, MB.OQ, attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are PAYC.N, SHOP.N, WK.N, CALD.OQ, AAPL.OQ, CSCO.OQ, IBM.N, SAPG.F, WDAY.N, ADSK.OQ, CRM.N) currently is, or was during the 12-month based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings period preceding the date of distribution of this report, a client of Credit Suisse. were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is Credit Suisse provided investment banking services to the subject company (MSFT.OQ, EVBG.OQ, OOMA.N, ADBE.OQ, SNCR.OQ, SHOP.N, assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - CALD.OQ, AAPL.OQ, CSCO.OQ, IBM.N) within the past 12 months. 5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Credit Suisse provided non-investment banking services to the subject company (AAPL.OQ, CSCO.OQ, IBM.N) within the past 12 months Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Credit Suisse has managed or co-managed a public offering of securities for the subject company (MSFT.OQ, EVBG.OQ, OOMA.N, SHOP.N, Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, CALD.OQ, CSCO.OQ, IBM.N) within the past 12 months. including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other Credit Suisse has received investment banking related compensation from the subject company (MSFT.OQ, EVBG.OQ, OOMA.N, ADBE.OQ, circumstances. SNCR.OQ, SHOP.N, CALD.OQ, AAPL.OQ, CSCO.OQ, IBM.N) within the past 12 months

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