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MSFT: 4Q13 review; revised FY14E-FY15E; reit. Buy




Griffin Securities, Inc.


19 Jul 2013





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We are maintaining our long-term investment thesis based on the prospective returns of the overall cross-segment product strategy, e.g., the repurposing of key brands; new product releases; potential share gains in markets where Microsoft has been under-represented; declining losses in Online Services; and continued good growth in emerging subscription offerings, e.g., Office 365, and “unearned revenues”, especially for MBD and Server & Tools (STD). We are reducing our FY14E-FY15E. In 4Q13, each of the segments fell short of our expectations, with Windows (WWLD) and Entertainment & Devices (EDD) in particular missing as a proportion of estimated revenues. The “x86” secular market trend and company product transition effects in WWLD were especially pronounced, and the urgency of evolving the OS business remains clear – but it’s also clear there are other parts of the company that are showing good signs of life. While operating expenses will grow in FY14 – i.e., new Windows and Xbox cycles and organic investments in emerging businesses - Microsoft reduced its FY14 expected operating expense range by $300 million, though no headcount reductions are planned. We expect it to pursue sales capacity expansion across its product lines, including for retail sales. Cost of revenues will increase by more than we had modeled, tied to Surface expansion and investments in infrastructure for various cloud-y businesses. Chart 1 shows the progression of unearned revenues by segment and Chart 2 shows the evolution of WWLD cost of revenues. We reiterate our Buy rating on MSFT.

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