An Analysis of Microsoft. October 7, 2011

Transcription

1 An Analysis of Microsoft October 7, 2011

2 T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor The General Motors Building 767 Fifth Avenue, 18 th Floor New York, NY (212) Info@T2PartnersLLC.com

3 Disclaimer THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK AND CALL OPTIONS IN MICROSOFT AS OF 10/7/11. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED. -3-

4 Microsoft s Stock Price Microsoft Over the Past Ten Years Microsoft Over the Past Three Years -4-

5 Highlights Very Cheap Stock Stock Price: $26.25 (close on 10/7/11) Net Cash, Equity and Other Investments Per Share: $6.07 TTM Earnings: $2.69 Historically Cheap Multiple: 7.5x trailing earnings, net of cash Currently on the midst of a Large New Product Cycle Office 2010 Windows 7 Microsoft is A Key Player in Emerging Themes Cloud Computing/Virtualization Gaming Mobile, search? Decent Capital Allocation (though much room for improvement) In FY 2011, Microsoft paid out $5.2 billion in dividends (2.4% current yield) and repurchased $11.6 billion in stock, though the pace slowed in the last two quarters -5-

6 Microsoft: Myths vs. Facts Myth: Microsoft is a dying company (think newspaper, paging companies and check printers), with declining sales, margins and market share Facts: Dominant market shares in key product categories are stable or rising, revenues are rising (8.3% last quarter), as are profits (35% EPS growth last quarter, though only 8.6% if tax rate is held constant) Myth: Microsoft isn t innovative Facts: Office 2010 and Windows 7 are hit products. Windows 7 has sold nearly 450 million licenses and Windows 8 is already being previewed, to rave reviews. Only 25% of enterprise desktops have deployed Windows 7, though 90% plan to A big push into cloud computing. Office 365 has launched. More than 20% of the Fortune 500 have started adopting Microsoft s online services. Major cloud computing wins (California state government covering 200,000 employees, etc.) Xbox is the #1 game system, with sales of 1.7 million units last quarter and 35 million Xbox Live members Bing market share is 14.4%, up from 11.0% a year ago -6-

7 Windows 8 Reviews -7-

8 THIS is a Dying Business??? -8-

9 Key Financials 12 months Jun months Jun months Jun months Jun months Jun Total Revenue $51,122 $60,420 $58,437 $62,484 $69,943 Growth Over Prior Year 15.4% 18.2% -3.3% 6.9% 11.9% Gross Profit 40,429 48,822 46,282 50,089 57,548 Margin % 79.1% 80.8% 79.2% 80.2% 77.7% EBITDA 20,385 26,002 23,267 26,711 29,927 Margin % 39.9% 43.0% 39.8% 42.8% 42.8% Operating Income (EBIT) 18,949 24,130 20,976 24,098 27,161 Margin % 37.1% 39.9% 35.9% 38.6% 38.8% Net Income 14,065 17,681 14,569 18,760 23,150 Margin % 27.5% 29.3% 24.9% 30.0% 33.1% Diluted EPS Excl. Extra Items Growth Over Prior Year 18.9% 31.2% -13.3% 29.6% 28.1% Shares Outstanding (Diluted) 9,886 9,470 8,996 8,821 8,521 Total Net Cash, Equity & Investments 31,172 27,759 28,972 38,603 51,716 In millions, except per share items -9-

10 Segment Financial Breakdown Segment Revenue ($ millions; qtr ended 6/30/11) $1,485, 9% $662, 4% $1,485, 9% $662, 4% $32, 0% Segment Oper. Profit ($ millions; qtr ended 6/30/11) $(728), -8% $5,777, 33% $5,777, 33% $1,774, 20% $3,618, 40% $4,643, 27% $4,643, 27% $4,740, 27% $4,740, 27% $2,943, 32% Microsoft Business Windows & Windows Live Server & Tools Entertainment & Devices Online Services Windows & Windows Live Server & Tools Entertainment & Devices Online Services -10-

11 Microsoft Is a Well-Diversified Global Business FY 11 Net Revenue -11-

12 Rumors of Microsoft s Demise Are Greatly Exaggerated PC Shipment Share By Operating System Source: Gartner -12-

13 Rumors of Microsoft s Demise Are Greatly Exaggerated (2) Office Suites Market Share (2009) Source: Gartner -13-

14 Rumors of Microsoft s Demise Are Greatly Exaggerated (3) -14-

15 Fair Criticisms of Microsoft The company, under CEO Steve Ballmer, has largely missed some of the biggest new areas in recent years: search, social networking, smartphones, etc. Due to an insular culture of complacency and arrogance, fostered by CEO Steve Ballmer? Though the majority of its cash and cash flows are trapped overseas to avoid U.S. taxes, Microsoft could easily borrow tens of billions to buy back stock and commit to using its prodigious cash flows to substantially boost its dividend See Ivory Capital s letter to Microsoft s board ( which we agree with. Specifically, Ivory calls on Microsoft to: 1. Issue $40 billion of debt (targeting net debt on the balance sheet of zero); 2. Use net proceeds from the debt offering to conduct an aggressive one-time share buyback; 3. Use 100% of ongoing domestic free cash flow of $10 billion for payment of common dividends; and 4. Borrow against ongoing international free cash flow of $15 billion to buy back shares each year. Ivory estimates that this recapitalization would enable the company to repurchase approximately 20% of its shares outstanding today, increase the annual dividend to $1.48 per share (6% yield based on current stock price), and buy back up to 9% of the shares outstanding each year (depending on price of buyback). -15-

16 Expected Return/Potential Upside Analysts are currently expecting Microsoft to earn $2.85 in the next 12 months (FY 2012), up 6% YOY. We think this is too low, especially given modest ongoing share repurchases. We wouldn t be surprised to see Microsoft earn $2.90-$3.00 in FY 2012, up 8-12%. MSFT s closing price on 10/7/11: $26.25, so assuming $2.95/share of FY 2012 earnings, plus $7/share in cash, here are possible stock prices and returns (plus there s a 3.1% dividend): Multiple 8x 10x 12x Stock price $30.60 $36.50 $42.40 Return 17% 39% 62% -16-

17 Appendix

18

19

20

21

22

23

24