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Friday, July 21, 2006

Microsoft Kicks It Up A Notch

By William Trent, CFA of Stock Market Beat

Microsoft Corp. (MSFT) raised its outlook for the current fiscal year as orders for upcoming products exceed expectations, lifting its shares by 6 percent in after-hours trading. The company also announced a new share buyback program that includes a $20 billion tender offer scheduled for next month and an authorization for up to $20 billion in additional buybacks through 2011. The software maker’s net profit was $2.83 billion, or 28 cents per diluted share, for its fiscal fourth quarter ended June 30. A year ago, Microsoft delivered a net profit of $3.7 billion, or 34 cents per share, boosted by a tax gain. Excluding a legal charge, Microsoft earned 31 cents per share. On that basis, analysts, on average, had forecast Microsoft to report a profit of 30 cents per share on revenue of $11.6 billion. Fourth-quarter revenue rose 16 percent to $11.8 billion.

On the conference call, management said:

Our core businesses turned in an excellent performance with double-digit bookings growth in both the quarter and full year and unearned revenue finished the year growing 19%, which is a tremendous performance. We saw broad-based strength from business customers for not only our core Windows Office and Server products but also increased demand for Communications Products and Services.

As we have described previously, deferred (unearned) revenue is an important growth indicator for software companies. It represents money the company has already been paid for services yet to be delivered. When the company performs the services it will book the revenue and reduce the liability account created when they received the advance payment. For Microsoft to grow its unearned 19% (almost twice the rate of revenue growth) shows the company still has some sizzle.

The strong bookings were attributed to the upcoming major product releases of Windows Vista and Office 2007. We have said on a number of occasions that a strong upgrade cycle for Vista/Office could drive growth throughout the tech sector. Microsoft’s strong bookings are a sign that the end of the tech pain (or at least a few months of alleviation from it) could be near.

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