MS gives dividends for the first time ($870M), stock split, Xbox surprise performer

[Asher]

http://news.com.com/2100-1001-981035.html?tag=fd_top

Microsoft sets dividend, splits stock


By Joe Wilcox
Staff Writer, CNET News.com
January 16, 2003, 2:57 PM PT


update Microsoft set its first-ever annual stock dividend Thursday and said it will split its stock as quarterly earnings surpassed expectations.
In an unexpected move, the software titan announced an annual dividend of 16 cents per share prior to a 2-for-1 stock split. The total payout will be $870.6 million, a fraction of its $40.5 billion cash reserves.

After charges and gains, Microsoft reported earnings Thursday of $2.55 billion, or 47 cents a share, compared with $2.28 billion, or 41 cents per share, a year earlier. The Redmond, Wash.-based company's second fiscal quarter ended Dec. 31.



Microsoft took a $210 million charge to cover an estimated $1.1 billion settlement of consumer class-action lawsuits in California. In the year-ago quarter, the company took a $660 million charge for another $1 billion settlement rejected by a federal judge. The company also took investment charges of $421 million and gained $126 million in a one-time tax benefit.

A consensus of analysts polled by First Call anticipated earnings of 46 cents per share. In October, Microsoft projected revenue between $8.5 billion and $8.6 billion, with earnings around 45 cents to 46 cents per share. The company had projected operating income of $3.2 billion to $3.3 billion.

Revenue grew 10 percent to $8.54 billion from $7.74 billion a year earlier. Sequentially, sales jumped from $7.75 billion in the fiscal first quarter.

In an unusual move, Microsoft waited about an hour after the market closed to issue the earnings release. Shares closed at $55.35, down 92 cents.

Microsoft's revenue soared to its highest quarterly level ever in part because of its game console Xbox, other consumer products, and continued strong demand for Windows XP and server software. The company launched four major products during the quarter: MSN 8, Windows XP Media Center Edition, Tablet PC and Xbox Live. Three of those products contributed to strong consumer sales.

But the Xbox may be the surprise performer. Last year, some financial analysts predicted Xbox sales would drag down Microsoft profits as much as 10 cents a share through fiscal 2004. But the company defied gravity, buoyed in part by strong Xbox Live and games sales. Microsoft has shipped 8 million game consoles since Xbox's launch in November 2001. The company sold 250,000 Xbox Live starter kits in the first 60 days after the device's release.

The company also reported increased demand for enterprise server software, with revenue up 12 percent. In addition, Microsoft continued to reap benefits from its Licensing 6 program, which moved a large number of customers to an annuity payment model. Under the program, customers pay for the software in annual payments during two- or three-year contracts. Microsoft initially records the money as unearned revenue, turning it into actual revenue over the life of the contract. Realization of unearned revenue accounted for about 22 percent of the quarter's revenue.

"The company delivered solid results in every business despite a challenging global economic environment," John Connors, Microsoft's chief financial officer, said in a statement. "While we are very optimistic about the future of the technology sector, we do not expect to see a significant upturn in global IT spending in the short term."

Connors offered guidance for Microsoft's third fiscal quarter, which ends April 30. The company expects revenue to be between $7.7 billion to $7.8 billion, operating income between $3.4 billion and $3.5 billion and earnings per share of either 47 cents or 48 cents. For fiscal 2003, Microsoft projects revenue of $31.9 billion to $32.1 billion, operating income of $14.1 billion to $14.3 billion, and earnings per share between $1.90 and $1.93.

In October, the company projected sales of $33.2 billion to $33.6 billion, operating income of $14.1 billion to $14.4 billion and earnings per share between $1.89 and $1.95 for fiscal 2003.

Cash hoard
Analysts had been watching this quarter for signs of how Microsoft might better use its cash hoard of nearly $41 billion. In a Wednesday research note, Deutsche Bank analyst Brian Skiba estimated Microsoft's cash stash would reach $53.5 billion by the close of fiscal 2003 in June and top $85 billion in fiscal 2005.

Skiba saw four major options for dealing with the cash: Buy back shares; make more acquisitions; increase lending through Microsoft Capital; or pay out dividends.

Microsoft's decision to pay out an annual dividend comes as Congress considers approving a White House proposal to end investor taxes on dividends.

"Declaring a dividend demonstrates the board’s confidence in the company’s long-term growth opportunities and financial strength," Connors said in a statement. "We are especially pleased to be able to return profits to our shareholders while maintaining our significant research and development efforts and satisfying our long-term capital requirements."

But during a Thursday afternoon conference call, some financial analysts questioned the size of the dividend, considering Microsoft's cash on hand.

"You could probably characterize our dividend as a starter dividend," Connors told financial analysts. He explained that Microsoft evaluated about 30 other companies paying out dividends. He indicated that Microsoft's board would continue to evaluate the dividend.

Solving Microsoft's cash problem remains a major concern for Wall Street, particularly as the company prepares to unleash a torrent of new products this year.

"Microsoft will release more new products in 2003 than ever before," Brendan Barnicle, a Pacific Crest Securities analyst, wrote in a research note on Wednesday. On tap: Windows 2003 Server, Exchange Server 2003, Office 11 and a new suite of server products code-named Jupiter, among others. "Historically (Microsoft) has spiked with new releases of Windows and Office," Barnicle wrote.

At the same time, Microsoft continues to benefit from unearned revenue, which is like having sales in the bank for upcoming quarters. The company ended the second quarter with $8.83 billion in unearned revenue. During the first quarter, unearned revenue swelled to $9.13 billion, mostly from licensing, up from $5.85 billion a year earlier.

The majority of unearned revenue comes from software licensing, but not all. Microsoft also includes undelivered items, such as software moved through retail or technical support, in the mix. The non-licensing category accounts for anywhere from 10 percent to 25 percent of unearned revenue.

Analysts also seemed hopeful about a Microsoft program that could diminish the threat of Linux and other open-source software from stealing customers from Windows. On Tuesday, Microsoft revealed that some governments would gain access to the Windows source code.

"The program is a pre-emptive move to prevent the replacement of Windows by Linux within government agencies, Microsoft's most-threatened vertical, Thomas Weisel Partners analysts Robert Schwartz and Tim Klasell wrote in a Wednesday research note. "This announcement demonstrates Microsoft's capability to defend and maintain its monopoly when the competition is feature-rich and free."

Connors told financial analysts that Linux remains a serious threat to Microsoft's server business. "The ramifications of free software to our business model should be obvious to everyone," he said.

Segment results
This is the second quarter Microsoft has reported earnings under a new organization announced last summer. Under the new structure, the company reports revenue for seven divisions: Client, Information Worker, MSN, Home and Entertainment, CE/Mobility, Server Platforms and Business Solutions. The Client group includes desktop and embedded operating systems; Information Worker is made up of Office, other stand-alone applications and professional product support; MSN refers to the online network and access services; Home & Entertainment includes the Xbox game console, consumer hardware and software, PC online games and the TV platform; CE/Mobility refers to mobile devices; Server Platforms is made up of server operating systems, .Net servers, developer tools, premiere support and consulting, training certification and Microsoft Press books; and Business Solutions includes Great Plains, bCentral and Navision.

In a routine filing with Securities and Exchange Commission, Microsoft in November revealed that under the new organization only Office and Windows turned a profit during the first quarter.

But some divisions, including MSN, entered the second quarter close to profitability.

Revenue for the Client group was $2.55 billion compared with $2.54 a year earlier. Strong Windows XP sales contributed greatly to the results.

The Information Worker division saw sales rise 8 percent to $2.29 billion from a year earlier. Microsoft is expected to release the next version of the group's product suite, code-named Office 11, by midyear.

MSN posted revenue rose to $459 million compared with $372 million a year earlier.

Revenue for the Home and Entertainment reached $1.33 billion, up from $960 million year over year, an increase of 38 percent. Sales of consumer hardware and software declined, while sales of Xbox, Xbox live and games increased.

CE/Mobility posted sales of $22 million, up from $17 million a year earlier.

Sales of Server Platforms reached $1.76 billion, up 12 percent year over year. The group benefited from strong sales of Visual Studio .Net and SQL Server.

Business Solutions reported revenue of $135 million compared with $73 million a year earlier.

Regionally, the Americas accounted for $3.26 billion in sales, compared with $3.16 billion last year, up 3 percent year over year. Revenue for the Europe, Middle East and Africa region grew 32 percent to $1.87 billion from $1.42 billion a year earlier. Japan and the Asia-Pacific region saw an 11 percent sales decrease, to $871 million from $785 million a year earlier.

Original equipment manufacturer (OEM) revenue reached $2.54 billion, a 7 percent increase over the $2.39 billion reached a year earlier.

The dividend is payable March 7 to shareholders of record on Feb. 21. The split is expected on Jan. 27.

Wow! Record revenues, the Xbox is doing much better financially than everyone predicted, a 2 for 1 stock split, and finally giving out dividends!

Even more surprising are the insane cash figures. $41B in cash right now, $53.5B by the end of fiscal 2003, $85B by fiscal 2005? Jesus.

They're also allowing governments access to the Windows source code.

Interesting also is that Gates alone will get $100M from the dividends, Ballmer will get $38M. If Bush's "economic stimulus" passes, Gates will save $38.4M in taxes.

Also worthy of discussion, but I don't want to start a thread on it, is AMD's situation: http://news.com.com/2100-1001-981036.html?tag=lh

Quarterly loss of $854M. God, that company is so clueless.

[alva]

Interesting also is that Gates alone will get $100M from the dividends, Ballmer will get $38M. If Bush's "economic stimulus" passes, Gates will save $38.4M in taxes.

sounds like louis IV to me

[Drake Tungsten]

Even more surprising are the insane cash figures. $41B in cash right now, $53.5B by the end of fiscal 2003, $85B by fiscal 2005? Jesus.

That much money in the bank and they only give out $870 million in dividends? Greedy bastards...

[Asher]

That much money in the bank and they only give out $870 million in dividends? Greedy bastards...

How exactly do you think dividends work?

What purpose do you think the cash reserves serve?

Cash reserves aren't buckets of profit that the company uses to buy suites in Hawaii you know.

They're used for corporate strategic moves and acquisitions mostly, like buying Rare.

I think $870M in dividends on ~$2.5B in profit is a pretty damn good deal.

[Oerdin]

That cash hord has been building for more then a decade. Supposedly MS's stock price won't be as volitile after they start paying dividends since more "buy & hold" retires will aquire the stock as a way to pay for their retirement incomes.

[JohnT]

Something tells me that if MS paid out $40 billion in dividends, some people here would change their tune to "greedy stockholders."

[Asher]

Originally posted by JohnT
Something tells me that if MS paid out $40 billion in dividends, some people here would change their tune to "greedy stockholders."

Precisely...
You just can't win with people like Drake though.

He'll disagree that they give only $870M in dividends, he'll disagree that they gave $40B in dividends because that would give Gates alone well over a billion dollars in cash...

It'd effectively transfer money from MS' company coffers into MS exec's personal pockets for the most part.

[Urban Ranger]

16 cents per share is what percent? Lets see. If MSFT were at $16, that would be 1%. So its paying out less than 1% dividend and people applaud them?

I just have to agree with Drake there.

[monolith94]

I think that with all that money, they can find it in their heart to give me, like a million dollars.
heck, I'd even settle for 500,000 !!!

[Asher]

Originally posted by Urban Ranger
16 cents per share is what percent? Lets see. If MSFT were at $16, that would be 1%. So its paying out less than 1% dividend and people applaud them?

I just have to agree with Drake there.

The dividend yield is 3%, which isn't shabby at all.

And please, do elaborate: how are they greedy bastards, when the higher the dividend means the more the MS execs will get? Just a tiny logic hole, no need to worry...

[Drake Tungsten]

I think $870M in dividends on ~$2.5B in profit is a pretty damn good deal.

It's not a good deal and only an idiot MS fanboy like yourself would think it was. Read what financial analysts are saying about the MS dividend program. They've called it disappointing. Even MS has said that it's a "starter" dividend program. 16 cents a share from a company with over $50 billion in cash reserves is a joke...

Something tells me that if MS paid out $40 billion in dividends, some people here would change their tune to "greedy stockholders."

I wouldn't. It's the stockholders company and MS should treat them better.

[Urban Ranger]

Of course, Microsoft has never disputed Bill Parash, so their report can be just hocus-pocus.

[Asher]

Originally posted by Drake Tungsten
It's not a good deal and only an idiot MS fanboy like yourself would think it was. Read what financial analysts are saying about the MS dividend program. They've called it disappointing. Even MS has said that it's a "starter" dividend program. 16 cents a share from a company with over $50 billion in cash reserves is a joke...

Please, Drake...

1) It's $40B
2) The dividend yield is 3%. Of course the finance people want more -- they all own MS stock and they'd get more out of it if it was higher! 3% isn't terribly low. Intel's is 5%, by comparison.
3) This in no way constitutes them being "greedy bastards", because MS execs stand to gain the most out of higher dividends -- think about it!

I wouldn't. It's the stockholders company and MS should treat them better.

I think MS has treated them extraordinarily well...list 5 companies that have historically been as good of an investment as MS has been over the past 15 years.

[Urban Ranger]

Originally posted by Asher
The dividend yield is 3%, which isn't shabby at all.

I don't see how you get 3% by dividing 16 cents by $55.35.

Originally posted by Asher
And please, do elaborate: how are they greedy bastards, when the higher the dividend means the more the MS execs will get? Just a tiny logic hole, no need to worry...

I thought lots of MS employees and outside shareholders have stocks too? IIRC, they own the majority?

[Asher]

Originally posted by Urban Ranger
I don't see how you get 3% by dividing 16 cents by $55.35.

I thought your math would be better than that, Urban.

Where did you pull 1%?

0.16/55.35 = 2.9%

I thought lots of MS employees and outside shareholders have stocks too? IIRC, they own the majority?

Aye, they do, but such a huge number of people own the stocks that the difference is quite minimal to them.

It only makes a difference to people like Gates, who owns 11% of all MS stock...

[JohnT]

.16/55.35 = .00289.

.29% Asher, not 2.9%.

Sorry, but numbers don't lie.

[Asher]

Also, Drake, for future reference:

Dividends are not paid out on the basis of the size of the company's cash reserves, but on the profit they make during a period...

[Asher]

Originally posted by JohnT
.16/55.35 = .00289.

.29% Asher, not 2.9%.

Sorry, but numbers don't lie.

Err...duh.

[Drake Tungsten]

.16/55.35 = .00289.

.29% Asher, not 2.9%.

Sorry, but numbers don't lie.

Damn, you beat me to it. I wanted to be the one who exposed Asher's pathetic math skills...

Still think it's a good deal, glonky?

[Asher]

Originally posted by Drake Tungsten
Still think it's a good deal, glonky?

Absolutely, why is it a bad deal?

It was 0% before. People were expecting 0%.

16 cents per share is better than 0 cents per share. How is this a "bad deal"?

[Drake Tungsten]

Dividends are not paid out on the basis of the size of the company's cash reserves, but on the profit they make during a period...

If a company has huge cash reserves like MS does, they can obviously afford to give a significant part of their profits back to their shareholders in the form of dividends. To not do so serves no real purpose and is a disservice to stockholders.

[Asher]

Originally posted by Drake Tungsten
If a company has huge cash reserves like MS does, they can obviously afford to give a significant part of their profits back to their shareholders in the form of dividends. To not do so serves no real purpose and is a disservice to stockholders.

Nobody is forced to own MS stock, if the stockholders don't like it they don't need to buy MS stock.

Historically MS stock has done amazingly well, I can't think of a single stock holder who bought MS stock expecting dividends...so I also fail to see how this classifies as a disservice?

[Drake Tungsten]

16 cents per share is better than 0 cents per share. How is this a "bad deal"?

Microsoft can afford to give much more than 16 cents a share. It's better than nothing, but it's nowhere near being a "good deal".

[JohnT]

Oderin was spot on when he said:

"That cash hord has been building for more then a decade. Supposedly MS's stock price won't be as volitile after they start paying dividends since more "buy & hold" retires will aquire the stock as a way to pay for their retirement incomes."

That's why this is a good thing, Drake. It isn't about people getting a big payout for Q4 2002, but about price stability in the future and increasing the attractiveness of MS stock to a group of investors that is historically wary and susceptible to price volatility.

[Asher]

Originally posted by Drake Tungsten
Microsoft can afford to give much more than 16 cents a share. It's better than nothing, but it's nowhere near being a "good deal".

It's a good deal -- unexpected money is always good.

MS can afford to give more, and I bet you can afford to give more to charity.

Just because we can afford to doesn't mean we will.

MS has a lot of **** to deal with, including entering a ton of markets with stuff like SPOT and Xbox, to a $1.1B settlement in California and impending settlements in like 20 other states.

It'd be stupid for MS to give out insane sums of money of cash to shareholders who weren't expecting any to begin with...

It sounds to me like someone's just fishing for something to hate MS for. They start releasing dividends, everyone cry about how they're not giving everyone a million dollars because they can afford to.

[Drake Tungsten]

That's why this is a good thing, Drake. It isn't about people getting a big payout for Q4 2002, but about price stability in the future and increasing the attractiveness of MS stock to a group of investors that is historically wary and susceptible to price volatility.

I'm not looking for a huge payout, just a realistic dividend yield that will slowly move money from MS's overstuffed warchest to investors pockets. Right now, Microsoft's dividend is a joke. .29% yield? Please. If they increase the yield in the future, I'll change my opinion, but right now this whole thing just looks a stunt to me...

[Asher]

I'm not looking for a huge payout, just a realistic dividend yield that will slowly move money from MS's overstuffed warchest to investors pockets.

It almost sounds like you're making the case that MS' investors are pressed for cash.

The people who have been investing in MS have probably had a huge return on them, I don't see why huge dividends are important.

[Drake Tungsten]

MS can afford to give more, and I bet you can afford to give more to charity.

Shareholders aren't a charity, you nitwit. You're supposed to make them money and to not do so when you have the opportunity is a disservice. But since when did MS care about ethics...

[Drake Tungsten]

The people who have been investing in MS have probably had a huge return on them, I don't see why huge dividends are important.

Ask the large institutional investors who have been pressuring MS to pay dividends for years. This was an attempt to placate them and not a very good one.

[Asher]

Originally posted by Drake Tungsten
Shareholders aren't a charity, you nitwit.

I never said they were the same.

However, it's a similar philosophy when you actually think about it rather than troll.

Look at the average return rate investors have received from MS' stock. Compare that to virtually any stock out on the market.

Investors in MS have grown to not expect a dividend and to make lots of money off continually rising prices and stock splits. Anything more can almost be considered a charity move...

You're supposed to make them money and to not do so when you have the opportunity is a disservice. But since when did MS care about ethics...

This has nothing to do with ethics. Again, name one company that's made more money for more people other than MS in the past 15 years.

MS has always been providing that "service" to stockholders, dividends are not the only way to do that. That's why it's not a requirement to give dividends, you know.

To even begin to imply that it's ethical for MS to give a large percentage as a dividend is laughable at best.
1) Dividends are optional
2) People have never expected them from MS in the first place, and nobody forces you to buy MS stock -- you buy it under the assumption you're not getting a dividend from it

That's not unethical, it's just the way a lot of tech companies work.