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A More Mature Microsoft

UPDATED: Microsoft's surprise announcement Tuesday that it would share about $75 billion with stockholders over four years has investors and analysts wondering if the world's largest software company is still a growth company.

If it is, they want to know what's going to drive that future growth, at a time when the PC market where its Windows and Office products dominate has been slowing, and a major new release of Windows, called Longhorn, is widely seen as delayed until 2007.

Starting with its most fourth quarter and full year earnings release tonight, they expect to hear more about growth plans in coming weeks.

Beyond its one-time payout of $32 billion ($3 per share), Microsoft doubled its annual dividend to 32 cents. Plus, it's buying back $30 billion worth of stock over the next four years. In all, Microsoft said the package amounted to $75 billion worth of value that it is sharing with stockholders.

The announcement doesn't follow the regular actions of a company looking to expand ever-outward and upward, analysts said. But they also note that the payout -- the largest in U.S. corporate history -- also responds to investors that had been lobbying for the company to loosen its cash pile of $56 billion.

Mathew Emmert, a financial analyst at the investor Web publication Motley Fool (who is also a Microsoft shareholder), wondered about how the cash payout would impact Microsoft's future acquisitions, a standard practice for growth.

"Even after the distribution and doubling of the dividend, the company's only going to pay out a quarter of its cash flow," he added. However, it "may be too soon to pursue a large deal, given all the antitrust problems."

Microsoft, which generates about $12 billion in cash each year, has a lot of work to do on cost-cutting if it seeks to entice long-term investors, said Melanie Hollands, president of hedge fund Koala Capital.

Over the past five to six years, Microsoft has increased its operating costs as a percentage of its revenues from around 50 percent in 1998 to approximately 60 percent in 2003. What's more, she added, that revenue growth has dipped from 30-40 percent to the low-to-mid single digits.

"One of the catches with a maturing company is that as the growth levels off, the costs don't level off with it, it takes a while for the cost structure to catch up with it," she said. "So operationally, I want to see them getting a little bit leaner and efficient."

Steve Ballmer, Microsoft's CEO, has said as much. In his annual e-mail to employees on July 1st, seen by internetnews.com, he wrote:

"Over the past three years, Microsoft has invested significantly and as a result our expenses have grown faster than revenues. This obviously is not a trend we can continue. This year, we are targeting nearly $1 billion in efficiency improvement and cost reduction across the company, primarily by rethinking how we do things. For example, we will save hundreds of millions of dollars by driving more coordinated marketing in disciplines such as CRM and advertising."

Ballmer, whose note to employees came at a time when the company's stock price has been flat, said the company had great opportunities to grow its profits in order to improve its stock price.

Investors will be keen to hear more about how when Microsoft releases fourth quarter and full fiscal year earnings on Thursday afternoon, and meets with financial analysts next week.

"I think those dividend increases, generically, are a bullish act," Hollands said. "It's possible that withholding some of that growth leaves them the opportunity to bump it up again in the future so they can have a series of increases; in general, that's a politically good move. It's always better to add than to take away."

A Microsoft spokesperson said that "while the Board is confident in the company's long term potential it will evaluate the amount of the regular dividend each quarter."

Hollands sees little room for growth at Microsoft in the next couple years, mainly due to the limited areas where Microsoft can grow as well as the potential loss of business due to the increasing popularity of Linux operating systems on the market. She doesn't expect top-line growth exceeding the low to low-middle single digits for the next year or two.

During a conference call Tuesday to discuss the dividend plan, Bill Gates, Microsoft's chairman and chief software architect (who plans to donate the more than $3 billion dividend he'll receive to his Bill & Melinda Gates Foundation) pointed to a coming era of new products that would continue to help shape profits.

They include database products such as SQL Server, as well as Microsoft's search properties, which "would be improving in a dramatic way." Gates also cited search functionality that would be built into the next version of Windows, called Longhorn, as well as coming speech recognition tools, as some of the products where Microsoft would be gunning for growth, and profits.

In addition, Ballmer's e-mail to the company's 50,000 employees said he expects to see the worldwide base of PCs grow to one billion by 2010 from the 600+ growth over the past 20 years. "Along with PC market growth, our biggest growth opportunity is with our existing base of Office users. Delivering new information work scenarios such as collaboration, authoring, communications, planning and analysis, and expanding the toolset with new technologies such as SharePoint, Live Meeting, OneNote and InfoPath is an incredible opportunity for growth as we innovate in our product development and our marketing," he wrote.

Erin Joyce contributed to this story

Update clarifies Hollands view of Microsoft's growth in coming years.