NEW YORK (CNN/Money) -
There should be plenty of juicy tidbits in Microsoft's fiscal third quarter earnings report on Tuesday.
The market will pay close attention to how the software sultan did during what seems to have been a brutal quarter for many software firms. (Oracle, PeopleSoft and Siebel Systems all issued warnings.)
And as always, investors will be very interested in what the company says about the current quarter, specifically whether or not Microsoft is seeing a pickup in PC and server sales that can fuel demand for its software.
Investors should also keep a close eye on Microsoft's unearned revenue -- sales that Microsoft expects to get down the road from software upgrades. Last July, Microsoft changed its upgrade policy. It offered corporate customers a discount if they paid for upgrades on an annual subscription basis.
So the unearned revenue figure will help give a clearer picture of Microsoft's sales outlook for the next few quarters. In the second quarter, Microsoft reported $8.8 billion in unearned revenue.
Analysts expect Microsoft (MSFT: Research, Estimates) to report earnings of 24 cents a share in the fiscal third quarter on sales of $7.7 billion. For the fiscal fourth quarter, estimates are for a profit of 24 cents a share and revenue of $8 billion. Drake Johnstone, an analyst with Davenport & Co, thinks that this number might be a tad high and that Microsoft will guide down slightly.
Mo' money, mo' money, mo' money
But what I'm most curious to see in Mr. Softee's results is just how much cash the company has on the balance sheet and whether or not it has any concrete plans to put some of it to use.
At the end of December, Microsoft's hoard stood at a whopping $43.4 billion. Johnstone estimates that Microsoft generated another $3 billion in the third quarter.
$46 billion! Imagine what you could do with that cash. It makes you wonder if Bill Gates and Steve Ballmer have a big vault of gold at the corporate headquarters in Redmond that they swim in, like Scrooge McDuck.
Well, since spending other people's money is fun, let's go ahead and do that.
Based on current market valuations (and assuming no takeover premium) Microsoft could put an end to worries about what would happen if Apple bought Universal Music from Vivendi. Buying Apple and all of Vivendi would only cost about $21 billion.
Or Microsoft could go out and buy SAP, Siebel Systems and PeopleSoft and still have almost $10 billion left over. Take that Larry Ellison!
Biz software and gaming deals make sense
That obviously is not going to happen. But Microsoft has realized that it needs to diversify in order to keep growing. The company has made several acquisitions over the past few years in the enterprise software area to compete more effectively against Oracle, most notably scooping up business-to-business e-commerce software company Great Plains and accounting software developer Navision.
Richard Williams, chief strategist with Summit Analytic Partners, an independent research firm that focuses on software stocks, said that two areas where Microsoft needs to improve its stable of product offerings are in supply chain management and in customer relationship management software.
On the supply chain side, I2 (ITWOE: Research, Estimates), Manugistics (MANU: Research, Estimates) and Logility (LGTY: Research, Estimates) are possible targets, Williams said. Onyx Software (ONXS: Research, Estimates) and Pivotal (PVTL: Research, Estimates) could also make sense on the CRM side. More likely, though, would be acquisitions of private companies, Williams said.
Johnstone also thinks that more acquisitions of business software companies are in the cards. But he added that Microsoft could also use its nearly bottomless pit of cash to buy video game software developers to bolster its unprofitable Xbox business. Johnstone does not own shares of Microsoft and his firm has no investment banking relationship with it.
But shareholders of companies like Activision and THQ shouldn't get too excited. Johnstone also thinks Microsoft would prefer to buy private companies, as opposed to paying premiums for public companies.
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Regardless of what Microsoft's near-term or long-term acquisition plans, there is another thing that Microsoft could do with that cash that would be to the benefit of shareholders...and I don't mean more stock buybacks.
"Microsoft probably has to start giving higher dividends," said Kimberly Caughey, an analyst with Parker/Hunter. She owns the stock but Parker/Hunter has no investment banking relationship with the company.
Even if President Bush's tax relief plan for dividends gets the kibosh in Congress, Mr. Softee can afford to pay higher than the 0.3 percent yield it currently offers. Microsoft's annual dividend is only 8 cents a share. Based on its most recent share count of 10.7 billion, the dividend program will cost Microsoft $856 million, or a mere 2 percent of its cash.
Must be nice to consider that chump change.