Microsoft Not Ready to Boost Dividend

Sidestepping the standing investor question over what it plans to do with its massive $50 billion cash reserve, Microsoft Thursday dashed speculation that it would boost the dividend it put in place in January.

“Our current capital management policy strategy remains intact,” Microsoft Chief Financial Officer John Connors said during the company’s fiscal fourth quarter earnings call.

Connors said the company would continue to manage its incremental dilution and maintain “significant funds” in order to acquire key new technologies and cover its legal risk.

“We are not going to have a dividend program change or stock buy-back commitment to announce at the financial analyst meeting [next week],” Connors said. “We really need to get through a couple of very significant legal issues both in terms of what the financial impact would be and the business model impact; most notably the E.U. as well as the Sun antitrust case. We don’t feel it would be prudent to commit to a long term program until we see our way through those.”

Connors reported that the company recorded revenue of $8.07 billion for its fiscal fourth quarter, which ended on June 30, blasting past consensus estimates of $7.83 billion. That’s an 11 percent increase over the $7.25 billion in revenue it reported for the year-ago quarter.

But its net income came in at $1.9 billion, or 18 cents a share in the
quarter, including a 5 cent per share charge based on $533 million in
after-tax settlement charges.

Excluding that charge, the company declared earnings of 23 cents a share, a penny short of the consensus estimate of 24 cents a share compiled by Thomson First Call. Overall however, Microsoft’s net income was up by 24 percent over its net of $1.53 billion, or 14 cents per share, a year earlier.

The software giant focused on its sales growth, citing strong
growth in its Server Platforms and MSN divisions, as well as growth in its
Home and Entertainment division, driven largely by its Xbox console.

The company also announced revenue of $32.19 billion for its fiscal year, a
13 percent increase over the $28.37 billion it reported last year.

Microsoft said net income rose to $9.99 billion, or diluted earnings per share of 92 cents, for the fiscal year, compared to net income of $7.83 billion and diluted earnings per share of 70 cents for the previous year, an EPS improvement of 31 percent.

“In fiscal year 2003, we reported double-digit revenue growth in each of our businesses,” Connors said. “In the fourth quarter, sales came in better than expected, reflecting solid corporate and consumer demand for our products. Going into the new year, we will continue to focus on providing better customer value, growing opportunities with small and medium businesses, increasing our enterprise penetration and improving performance in our emerging businesses.”

He added, “The past year was another tough one for our industry. It was characterized by tight IT spending budgets, geo-political uncertainty and generally weak economic conditions, particularly in the Eurozone and Japan. Despite all the challenges, we had a solid year, relatively speaking.”

The company reported that Server Platforms saw revenue growth of 17 percent over the year-ago quarter, fueled by 24 percent growth in Windows Server revenue and 34 percent growth in SQL Server revenue. Also, the company reported increasing demand for the enterprise editions of its core server products.

The software giant also noted that MSN turned in record revenue in the
fiscal fourth quarter, growing 25 percent year-over-year, driven by a 48 percent spike in advertising revenue.

“In the past year, we have made significant progress with both our
performance based advertising and our brand advertising on the MSN
network,” said Yusuf Mehdi, corporate vice president of MSN. “With
customers like Nestle, Visa and Kraft, MSN is proving that it is a premier
Internet location for advertisers.”

Finally, the company said Home and Entertainment revenue grew 8 percent
year-over-year, on the back of higher than expected Xbox console sales.
Microsoft said it has sold 9.4 million of the consoles since the launch in
2001, and expects to have sold 14.5 million to 16 million boxes by this
time next year. Microsoft also noted that its Xbox Live online gaming
service now has more than 500,000 subscribers worldwide which participate
in more than 1 million game sessions each week.

Looking ahead, the company expects revenue for its fiscal first quarter
2004 to come in between $7.9 billion and $8.1 billion, with operating
income in the range of $3 billion to $3.1 billion, including an expense of
$980 million for its newly minted equity compensation plan for employees.
Diluted earnings per share are expected to come in at about 23 cents,
including an after-tax equity compensation expense of about 6 cents.

For full fiscal 2004, the company is forecasting revenue of between $34.2
billion and $34.9 billion, with operating income in the range of $11.3
billion to $11.6 billion. That includes an equity compensation expense of
about $3.9 billion. Diluted earnings per share are expected to come in
between 85 cents and 87 cents for the fiscal year, including an after-tax
equity compensation expense of about 24 cents.

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