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Caris & Company analyst Tim Boyd addresses clients on Microsoft's (MSFT) June Quarter Report. Excerpts follow:

Microsoft reported a Beat & In-Line June quarter – net revenue of $11,804MM and $0.31 in non-GAAP EPS were both above Street consensus for $11,627MM and $0.30, respectively. September quarter guidance came in at $10,700MM in revenue and $0.31 in EPS vs. Street expectations for $10,989MM and $0.31, respectively. FY07 guidance came was raised by management to $50,200MM in revenue and $1.45 in EPS, both higher than consensus. So at the margin, we’ll call it an In-Line quarter vis-à-vis guidance.

$40B in new stock repurchase authorizations are an incremental positive. MSFT announced that its board of directors has authorized new share repurchase programs, comprised of a $20 billion tender offer scheduled to be completed on August 17, 2006, as well as authorization for up to an additional $20 billion ongoing share repurchase program with an expiration of June 30, 2011. We also note that MSFT completed its existing $30B share buyback program 2 years ahead of schedule. So the company sees its stock as cheap, and based on the nice aftermarket rally in the shares it appears that a good number of investors agree.

Short-term deferred revenue was about $1.2B higher than we were expecting. This could suggest that customers are signing license agreements more aggressively than we thought in front of the launch of Windows Vista, Office 2007 and Longhorn Server.

We continue to view the development of adCenter, MSN/Windows Live and Office Live as the key drivers of long-term growth at MSFT. A key part of our thesis on the stock remains the fact that Microsoft is at a turning point, i.e. it is no longer adequate to be a packaged software company. Despite its upcoming new product launches, dominant market position, likely sales growth and cash generating potential, Microsoft must remake itself. It must succeed in building a viable and competitive digital services “company-within-a-company.”

In our view, Microsoft’s #1 long-term competitive threat continues to be Google (GOOG). Google has a great brand with both IT and the consumer. Google has become a “verb” – it was recently added to the Merriam-Webster dictionary as such – and that’s the best branding any company can hope for. Google has lined itself up with very high quality, open-source applications (e.g. Mozilla’s Firefox browser) and may at some point come out in support of Open Office, which has the potential to create havoc for Microsoft Office over the longterm.

In terms of the stock, we see the 5.5% aftermarket rally in the shares as mostly due to a positive investor response to the share buyback announcements. We estimate that MSFT will open at around $24 – about 17x our FY07 GAAP EPS estimate. Although this represents a discounted multiple historically and relative to some software peers, we continue to believe that the intra-quarter multiple compression is an appropriate reflection of the challenges faced by MSFT over the long-term. That having been said, we would not be surprised to see further strength in the shares during 2H06 as new product launches approach.

We remain comfortable with our long-term thesis on MSFT shares and maintain our 3*/Average rating. Our estimates are unchanged since they are already largely in-line with guidance.

Parsing the June quarter P&L

Fundamentals were mixed. MSFT’s total revenue growth accelerated from 13.3% in March to 16.2% in June. This up-tick in growth was driven by the Client, Server & Tools, Information Worker and Home & Entertainment segments, all of which accelerated. MSN was particularly weak during the quarter, posting its third consecutive Y/Y decline (3%). The operating margin was a bit weak sequentially (down 300 bps) but up Y/Y (130 bps).
Results surpassed Street expectations. Net revenue of $11,804MM and $0.31 in non-GAAP EPS were both above Street consensus for $11,627MM and $0.30, respectively.
Guidance was mixed vs. consensus estimates. September quarter guidance came in at $10,700MM in revenue and $0.31 in EPS vs. Street expectations for $10,989MM and $0.31, respectively. FY07 guidance came was raised by management to $50,200MM in revenue and $1.45 in EPS, both higher than consensus. So at the margin, we’ll call it an In-Line quarter vis-à-vis guidance.

What was bullish?

A Beat quarter. Net revenue of $11,804MM and $0.31 in non-GAAP EPS were both above Street consensus for $11,627MM and $0.30, respectively.
Accelerating Y/Y revenue growth. MSFT’s total revenue growth accelerated from 13.3% in March to 16.2% in June. This up-tick in growth was driven by the Client, Server & Tools, Information Worker and Home & Entertainment segments, all of which accelerated.
Elevated FY07 guidance that surpassed Street expectations. FY07 guidance came was raised by management to $50,200MM in revenue and $1.45 in EPS, both higher than consensus.
$40B in new stock repurchase authorization. The company announced that its board of directors has authorized new share repurchase programs, comprised of a $20 billion tender offer scheduled to be completed on August 17, 2006, as well as authorization for up to an additional $20 billion ongoing share repurchase program with an expiration of June 30, 2011.

What was bearish?

Weak September quarter guidance. September quarter guidance came in at $10,700MM in revenue and $0.31 in EPS vs. Street expectations for $10,989MM and $0.31, respectively.
Sequential margin compression. The operating margin was a bit weak sequentially (down 300 bps), although we note that it was up Y/Y (130 bps).
Continued MSN weakness. MSN was particularly weak during the quarter, posting its third consecutive Y/Y decline (3%).

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Source: Microsoft's June Quarter: Mixed Results, Outlook Uncertain