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Thanks Microsoft. What's next?
Wall Street is cheering the payout but MSFT needs to report solid earnings to keep the party going.
July 23, 2004: 8:16 AM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - By the way, Microsoft is reporting earnings after the bell Thursday.

It's easy to forget that, given the buzz over the company's stunning buyback/dividend/one-time pay out announcement Tuesday. Over the next four years, Microsoft could give back as much as $75 billion to shareholders. (For more details, click here.)

Shares of Microsoft (MSFT: Research, Estimates) jumped more than 3 percent Wednesday and are now just slightly below their 52-week high. At about $29, the stock is tantalizingly close to finishing above the $30 level for the first time in more than two years.

But if the company hopes to see continued gains in its stock price, Tuesday's largesse won't be enough.

Investors, after all, aren't going to buy the stock just because of the promise of a dividend. Microsoft needs to prove once again that there are healthy growth prospects.

"What drives the stock from here is fundamentals," said Robert Mattson, an analyst with Gartmore Global Investments, a mutual fund firm that owns the stock in several funds. "If Microsoft puts out good earnings and guidance, the stock could break through that $30 barrier."

Sales anything but soft?

The world's largest software company is expected to report earnings of 29 cents a share for its fiscal fourth quarter, up from 23 cents a year ago. Sales are forecast at $9 billion, an 11 percent increase from $8.1 billion in the same period last year.

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Investors are eagerly anticipating Microsoft's report because there has been a lot of confusion lately about the magnitude of the corporate tech spending recovery.

On the one hand, PC and server sales have been solid. But there are signs that big businesses are holding off on software upgrades.

Microsoft could help dispel that notion.

"Investors would like to see strength across their major product lines. That would bode well," said Mattson.

Analysts are hoping that recent strong hardware sales will translate into robust gains in revenue for Microsoft's three key business lines: client (which includes sales of the Windows operating system for PCs), server and tools (operating systems for servers as well as corporate database software) and information worker (Microsoft's Office suite of products, such as Word and Excel).

Is $30 the next stop for Microsoft?  
Is $30 the next stop for Microsoft?

These three divisions accounted for more than 85 percent of total sales in Microsoft's fiscal third quarter.

Jamie Friedman, an analyst with Fulcrum Global Partners, said that he thinks sales from the server and Office segments should be particularly strong, with revenues in both divisions increasing at least 15 percent from a year ago.

But the client side could drag down sales a bit, he said, as some customers appear to be waiting for Microsoft's latest version of Windows, dubbed Longhorn, to come out. Longhorn has experienced several delays, however, and might not be rolled out until 2006 or 2007.

Unearned revenue in focus
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CNNfn's Jen Rogers reports on Microsoft's decision to share $75 billion with shareholders over four years.

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Because of this, there have been worries about how strong Microsoft's software renewal rates will be. That's important since the company now has a subscription based model for much of its software -- a key metric that Wall Street looks at is unearned, or deferred, revenue, which measures the amount of sales the company expects to record in the future from license renewals.

Investors panicked when unearned revenue dipped $395 million in the fiscal second quarter. The company warned then that unearned revenue would fall again in the third quarter and it did, by $325 million, to $7.5 billion.

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But the company assured Wall Street that unearned revenue would pick up in the fourth quarter. Friedman said if it increases by between $300 and $400 million, that could convince investors that customers are in fact seeing a need to renew their software licenses instead of waiting for Longhorn.

"Unearned revenue is really important because it gives visibility into future revenue. In our view, concerns about it have created the weakness in Microsoft's stock for the past couple of years," said Friedman.

Brendan Barnicle, an analyst with Pacific Crest Securities, also thinks that the company will report a pickup in renewal rates. As such, he thinks Microsoft is likely to raise its full year fiscal 2005 guidance, which would obviously please Wall Street.

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The company said in April that it expected sales for 2005 to be in a range of $37.8 billion and $38.2 billion while earnings, excluding the cost of Microsoft's restricted stock program for employees, should be between $1.31 a share and $1.33 a share.

David Hilal, an analyst with Friedman Billings Ramsey said investors will want more details about how Tuesday's cash plan will impact earnings. The higher dividend and one-time payout would dilute profits but a lower share count from the buyback could offset that.

In addition, Hilal said he's expecting Microsoft to keep a closer eye on costs in some of its smaller divisions, such as its MSN Internet unit and home entertainment business (mainly Xbox). Improvement in those areas could also lead to a brighter earnings forecast.

Wall Street's consensus estimates of $38.6 billion and earnings of $1.34 a share are even higher than Microsoft's targets. So the question will be whether or not Microsoft can give new guidance that's even higher than these bullish forecasts.

But for the first time in a while, Wall Street is actually optimistic about Microsoft's outlook.

Fulcrum's Friedman and Pacific Crest's Barnicle own shares of Microsoft but their firms have no banking ties to the company. FBR's Hilal does not own shares of the company and his firm has no banking relationships with Microsoft.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.