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What Led to MSFT’s Recovery in 2017?

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Dec. 13 2017, Updated 8:41 a.m. ET

What led to the revenue recovery in 2017?

Microsoft’s (MSFT) revenue rose 5% in 2017 after a 9% decline in 2016. Product revenues have fallen over the years offset by growth in service and other revenue. The company saw revenue growth in the US in 2017 after a decline in 2016. Revenue from other countries fell in both the years. The company’s Productivity and Business Processes and Intelligent Cloud segments grew in 2017 offset by the More Personal Computing segment. While Intelligent Cloud was the only segment to record growth in 2016, Productivity and Business Processes saw flat revenue growth.

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How did diluted EPS perform in 2016 and 2017?

Gross margin expanded 6% in 2017 after a 13% drop in 2016. Operating expense rose 3% in 2017 after a 24% decrease in 2016. The lower operating expenses were due to lower impairment, integration, and restructuring expenses in 2016 and 2017. All of these factors translated into growth of 11% each in operating income for 2016 and 2017. Growth in dividend and interest income and a gain on investment led to substantial growth in other income in 2017 offset by higher interest expenses. Rising interest expenses had offset the effect of growth in dividend and interest income and gain on investment for 2016. Net income rose 38% and 26% in 2016 and 2017, respectively. Diluted EPS rose 42% and 29%, respectively, in 2016 and 2017. Share buybacks have further enhanced the EPS numbers.

The Schwab US Dividend Equity ETF (SCHD) is a dividend ETF with exposure to Microsoft. It has a PE of 20.3x and a dividend yield of 2.8%. The PowerShares Dividend Achievers (PFM) is a dividend ETF with exposure to Microsoft Corporation. It has a PE of 20.1x and a dividend yield of 2%.

We’ll discuss the company’s revenue and diluted EPS performance in 1Q18, dividend yield, price performance, and comparison of the stock with broad indexes (SPX-INDEX) (DJIA-INDEX) (COMP-INDEX) in the next part of the series.

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