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Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Microsoft Net Falls Amid Legal Costs

  • Summary: Microsoft's Q2 results were overshadowed by the announcement of a massive stock buy-back. Q2 results: revenue up 16% to $11.8 billion, beating analysts' consensus of $11.63 billion. Net profit of $2.83 billion. EPS of $0.28 per share included legal costs of $0.03, in line with analysts' consensus but lower than last year's $0.34 or, excluding one-time items, $0.30. Revenue from Servers & Tools rose 18%, driven by SQL Server, and generated a 53% increase in operating income. Guidance for fiscal 2007 (ends June 30th): Revenue of $49.7-50.7 billion, higher than the current consensus of $49.84 billion. EPS of $1.43-1.47, above current consensus of $1.40. CFO Chris Liddell said that the launch of Windows Vista in early 2007 will help Microsoft's Client Group revenue, and will entail $450 million of marketing spending and $450 million on sales expenses. Stock buyback: Microsoft will launch a $20 billion tender offer with a closing date of August 17th, using a Dutch auction. Microsoft will purchase up to 808 million shares, or 8.1% of its common stock, at a single price determined by shareholders offering stock within a price range of $22.50-24.75. Microsoft also authorized an additional $20 billion in additional buybacks through 2011.
  • Comment on related stocks/ETFs: Microsoft's stock (MSFT) rose 5.5% in late trading after the results and stock buyback were announced. The big news wasn't the results. They were broadly in line with analysts' estimates, though you could argue that even that fact was a strong positive for the stock given investors' overly pessimistic sentiment about Microsoft. The real stock-mover is the buyback. Microsoft is sitting on $34 billion of cash, meaning that anyone who owns Microsoft's stock is partially holding a not-very-tax-efficient money market fund. The stock buyback also signals to the market that Microsoft believes the worst of its legal woes are behind it, despite the recent EU ruling and fine. In the short run, the buyback will affectively put a floor under Microsoft's stock price due to the announced price range for the tender. Overall, this is a victory for the value investors -- see comments by Whitney Tilson and Geoff Gannon. In contrast, the chartists look dumb and those who focus on technology trends got the stock wrong, at least for now. Resources: Microsoft's press release; full conference call transcript.
Source: Microsoft's Results and Stock Buyback -- Key Facts & Analysis