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Fitch Rates Microsoft's Senior Unsecured Note Offering 'AA+'; Outlook Stable

Fitch Ratings has assigned an 'AA+' rating to Microsoft Corporation's (Microsoft) offering of U.S. Dollar- and Euro-denominated senior unsecured notes. Net proceeds from the offering are expected to be used for general corporate purposes, which may consist of working capital funding, capital expenditures, share repurchases, acquisitions and repayment of existing debt. The Rating Outlook is Stable.

KEY RATING DRIVERS

Microsoft's ratings and Stable Outlook reflect:

--Leading market positioning in its core software businesses, including over 90% in PC operating systems (OS) and 75% in servers.

--Very strong balance sheet with nearly $81 billion in cash and short-term investments.

--Diversification of end market with consumers and enterprise demand as well as strong geographic diversification. No customer is larger than 10% of revenue.

Fitch's credit concerns center on:

--Reliance on Windows and Office for the vast majority of free cash flow (FCF). In aggregate, these products accounted for 77% of total operating income, excluding unallocated corporate level expenses. However, strong growth and margin expansion in the Server and Tools business has reduced the contribution of Windows and Office from a four-year high of nearly 89%.

--Growing popularity of other operating systems outside of the core PC space, principally Apple's iOS as well as Google's Android and Chrome platforms. Fitch believes both platforms will continue to grow as competitive threats to Windows.

--Extension of PC replacement cycle due to the popularity of tablets and smartphones as well as consumer substitution of tablets in lieu of traditional PCs.

--Minimal historical success in developing profitable consumer businesses outside of Microsoft's core Windows and Office ecosystem despite significant investment over a decade-plus in other consumer markets. Fitch believes this is indicative of the challenging competitive environment.

--Significant dividend and share repurchase programs, though funded entirely today by FCF, could pressure the company to issue increasing amounts of debt to avoid repatriation of foreign earnings, which represent the majority of total annual FCF.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Penetration of alternative operating system's such as Chrome OS in the PC market and/or continued market share gains by Apple;

--Greater than expected extensions of PC replacement cycles because of tablets, without a commensurate gain from Microsoft Surface. Fitch currently expects PC replacement cycles to extend on average up to 12 months.

--Greater acceptance of cheaper software applications that compete with Microsoft Office such as Google Docs.

Positive: Upside movement on the ratings is unlikely.

Fitch currently rates Microsoft as follows:

--Long-term Issuer Default Rating (IDR) 'AA+';

--Senior unsecured debt 'AA+';

--Short-term IDR 'F1+';

--Commercial paper (CP) program 'F1+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810336

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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