December 17, 2005   Potential Scenario for Discussion Purposes Only

 Again, do your own due diligence! Do not rely on these notes or my discussion in making investment decisions.  My analysis is much more in depth, but here is a quick way I put things together.

Investment Thesis:

1.               Strong Cash Flow

2.               Blue Chip company

3.               Heavy insider ownership.  Bill Gates owns nearly 10%.

4.               Could continue to grow in excess of 10% for a decade.  Using rule of 72, if that were to happen, eps would be around $3.25 in 2015.  If you apply a p/e of 15 on that, the company would have a market price of $48.75.  This ignores the growth in cash.  If cash continues to grow at $1B  a month for 10 years (ignoring growth rates), then you could add $120B to market cap. Or $10 per share.  Hence one could argue that MSFT could have a value of $59 in 10 years.   That would be an 8% annual ROI.  Add to that the current dividend of 1.34%, you would have an accumulated PV ROI of 9.34%.  Again, all this ignores compounded growth of cash, even though we are increasing earnings.  The power of compounding would make the ROI much greater.

5.               A leader in corporate governance.  Keep in mind that Bill Gates is on the Board of Directors of Buffett’s Berkshire Hathaway.  Gates makes on $1M annually in salary, and has no options.

6.               Accounting Conservatism:

a.     Does not capitalize software development costs.  They are allowed to capitalize and they choose to expense immediately.

b.     Very little stock options given out.  They use Restricted Stock Grants sparingly.  Dilution is NOT a concern.

c.     SEC in 2002 ( I think that was the year), made them put “tax benefit of stock options” in the operating section of Statement of Cash Flows, rather than financing section.  This increased their presentation of operating cash flow.  FAS 123R has adopted MSFT old presentation and this item will now go in Financing Section for all companies.

7.               Strong financial position is an understatement.

8.               Strong product pipeline. 

9.               Regulatory and Linux concerns possibly overblown (see notes below).

10.            XBRL

Investment Risks:

1.               Worldwide Piracy

2.               Linux

3.               email complacency (Outlook)

4.               failed offerings

5.               Google

6.               Regulation

7.                Inherent Industry Technological Disruption

Possible Scenarios:

Quick Projection for Discussion purposes only!!!

December 16, 2005 (26.96)

1.               Quarterly dividend raised from $0.08 to $0.09 per share.  This is a 12.50% increase. Dividend of $0.36 annually is a rate of 1.34%.

2.               some eps estimates

3.               largest software company in the world, regulators and legal confrontations are a fact of life.

4.               CY 2006 pipeline includes, Xbox 360, Vista and SQL Server 2005.  Company has discussed its excitement with growth prospects with this pipeline.

5.               Cash on hand is $40b.  Free Cash flow is over $1B per month.

6.               Merrill in 12/15/05 report mentions that MSFT has plenty of room to expand dividend.  They cite a potential yield of 3.9%, which turns out to be a $1.05 annual dividend.  In a report a few days earlier, Merrill discussed the synergies and possibilities of AOL and MSFT alliance.  They discussed threats to Google.  They cited MSFT strong advertising growth at MSN.

7.               Garban has a sell rating and mentions that Japan Xbox introduction was weak.

8.               I spoke with Fred Hickey of “The High-Tech Strategist” today.  He mentioned that Xbox sales are fine, yet supply is constrained and delayed.  He fears that an early 2006 roll-out of Sony Play Station 3 would hurt Microsoft.  He also mentioned  that the legal threats to MSFT are not severe.  He mentioned that Xbox has not been breaking down as several reports have indicated.

9.               I have read on the net, but have not verified, that EA games CEO has mentioned that PS3 will be delayed to fall of 2006.  If this is accurate Xbox could have a huge head start.  I need to review Xbox Live.   I have read the Xbox works great with Ipod, Xbox live awesome, free unlimited phone calls with premium system (extra $99), games are better than on pc, this is a first.  This is only 1^st generation games, supposedly 2^nd generation will be blow away excellent.

10.            On December 1, MSFT announced a free online classified service to be rolled out.  Expected to be competitor of Craigslist ( partially owned by ebay).

11.            Risks include Linux, regulatory environment and Google.

12.            Supposed heart of .Net is to be released in 2006.  This includes Visual Studio 2005, SQL Server 2005 and BizTalk Server 2006.

13.            buy backs have been heavy.  These are happening without option dilution.

14.            MSFT spoke a few days ago at NASDAQ 16th Investor Program Conference.  Here are some highlights.

a.     expects 2006 revenue growth to be 10 – 12%.

b.     Continued strong cash flow

c.     Continued share purchases and dividends.

d.     Plans on buying back another $19B of common stock over next 5 quarters.

e.     Strongest product pipeline ever

f.      Expects to sell 2.75m to 3.0M Xbox units in next 90 days. 4.5M to 5.5M units in 2006.

g.     Excited about Windows Mobile and Office 12.

h.     Thinks Office 12 will be a program that will encourage upgrades. Older office products did not offer necessary enhancements.

i.      MSN has over 120M users.  Hotmail has over 205M active accounts.

j.      Expect to see similar eps and revenue growth patterns in the future as you have in the past.

k.     2006 is shaping up as year of investments; expect to harvest those investments in future years.    

15.            Gates owns almost 1B shares, or approx 10% of shares outstanding.  He only makes $1M a year. No options.  On BOD of Berkshire Hathaway.  Corporate governance appears to be exemplary.  Shareholder interests appear to be aligned.

September 29, 2005

Just recently, MSFT has been very focused on eliminating the beauracracy they have created, and have started focusing on scientist retention, sales force and google.  There were 2 recent write-ups in BusinessWeek.

Rule of Thumb by www.2ndopinionresearch.com

Revenues F2006E (FYE 6/30) are 44B (value line)

Net operating Margin (E) 31.5

Use P/S of 6 =  264B

add cash *******40B

subtract debt***00

potential market value  304B

current price  25

shares o/s  10,250

Market cap 256250

potential discount  16%

Keep in mind that Gates is grabbing 1,002,000 in full compensation (that is a touch over a million a year), and no stock options (poor guy ;-)

September 2, 2005

I'm thinking that most people would probably think that XBRL is a stock on the NASDAQ.

http://www.xbrl.org/Home/

" XBRL stands for eXtensible Business Reporting Language. It is one of a family of "XML" languages which is becoming a standard means of communicating information between businesses and on the internet. "

My understanding is that XBRL will be huge. As I write this, I'm putting it in the same category as Adobe Acrobat and maybe close to MSFT Word. I have been trying to figure what companies could benefit from the eventual and what looks to be probable proliferation of XBRL.

I was at an excel seminar this week, and asked the instructor my question on what he thought the beneficiary companies might be. I asked about MSFT. He basically saw no meaningful revenue generation from MSFT in this area. He really couldn't think of any companies. His reason being that it was open sourced software. He then discussed XBRL in the class. We were working with him on laptops. I noticed during the 2 day seminar that his screen in excel had the XBRL tab, whereas mine did not. Most of his excel discussion on XBRL (figure 5% of the total 2 day course) was in display format, since the concept is so new. The teacher explained how XBRL is built into Excel 2003. I have 2000. This is where I had the thought that there could be mass forced purchasing of XBRL capable products. Couldn't this be huge for the MSFT because of all the legacy users, who now want to work with XBRL (talking 2 years from now).

http://search.microsoft.com/search/results.aspx?st=b&na=88&View=en-us&qu=xbrl

As i invested in MSFT for the first time this year, XBRL was one of my reasons. MSFT is probably my largest position. I bought MSFT for several reasons and XBRL was hardly at the top of those reasonings. Now, I just think that it could be so much huger than I originally anticipated. any thoughts? 

June 22, 2005

1.                Gates owns 10.1%, other directors own 4.2%.  This is per VL 052705 issue.

2.                During May 2005 I read the Q’s and 10K.  The following are some observations and calculations.

Cash Flow                                          $11B

  Shares O/S                                       10.934B

Stockholders Equity                   $47B

Market Cap ($25 share price)               273B

Eps                                                      1.23

Book Value                                        4.33

3.                What are X-Box expectations.  According to VL, home entertainment is 7.8% of revenues.

4.                Morningstar on 6/15/05 wrote:

a.      “one of our favorite tech companies”

b.      60% of revenues and majority of its profits come from “two entrenched businesses with wide economic moats.”  The Windows operating system and Office applications.  Margins are near 80%, before accounting for restricted stock compensation.

c.      15% of revenues to R&D.  Spent more on R&D than Cisco, Sun Micro and Oracle combined.

d.      Generates about $1B per month in cash flow.

e.      Fair Value estimate of $30. 

f.       Annual Sales growth of 9% for next 5 years.

g.      Projects operating profits of 39%.