Microsoft offers first dividend, sets 2-1 split

Worst legal problems are over, company says


Declaring its most threatening legal problems over and its business strong, Microsoft Corp. surprised Wall Street yesterday by announcing that it would begin paying a dividend.

The step is significant mostly as an indication of the maturing corporate culture and psychology at Microsoft. But it does not seem to be a concession by the company's longtime leaders - Bill Gates, the chairman and cofounder, and Steven A. Ballmer, the chief executive - that Microsoft, the prototypical entrepreneurial high-tech growth company, is slowing down.

Financially, the annual dividend of 16 cents a share amounts to corporate pocket change. The annual dividend payout will cost Microsoft about $856 million a year. But the software company sits on a cash pile totaling $43.4 billion, and its business generates cash at the rate of $1 billion a month.

"This is a surprise, but it mostly reflects the economics of the business," said Charles di Bona, an analyst at Sanford C. Bernstein & Co. "It is not a sign that this is the end of growth for Microsoft. It is a recognition that this company is throwing off more cash than anyone has ever seen."

Still, Microsoft had long resisted calls that it use some of its ample cash to pay a dividend, saying that shareholders were better served by having management reinvest in new growth opportunities.

However, in the past few years, complaints from some institutional shareholders became louder as Microsoft's cash pile continued to grow and some of the management team's investments in cable television and telecommunications companies proved to be big losers.

Microsoft's two largest shareholders, Gates and Ballmer, will receive yearly dividends of $97.9 million and $37.6 million, respectively, based on their current holdings.

In an interview, John G. Connors, Microsoft's chief financial officer, said the company's board had reviewed the dividend issue repeatedly in recent years. A major obstacle, Connors explained, was the uncertainty created by the government's antitrust suit against Microsoft that began in 1998.

The biggest hurdle was removed in November when a federal judge approved the Bush administration's settlement with Microsoft, which did not significantly alter the company's structure or strategy.

Microsoft agreed last week to a $1.1 billion settlement in class action antitrust lawsuits brought by residents in California, the largest of the class action cases against Microsoft for allegedly using its monopoly power to overcharge consumers.

There are other cases pending, including an antitrust investigation by the European Commission and lawsuits by competitors including Sun Microsystems Inc. and AOL Time Warner Inc. The European Commission could fine Microsoft up to 10 percent of its revenue, or more than $3 billion, and force the company to share technical information with competitors.

"But after the settlement in the United States case, none of the remaining legal cases look like they will have a strategic impact on Microsoft's business," said Richard Sherlund, an analyst at Goldman Sachs & Co.

That seems to be the view at Microsoft as well. "As we moved forward on or resolved several of our major legal issues, this seemed the appropriate time to do this, to begin paying a dividend," Microsoft's Connors said.

And he bridled at any suggestion that the dividend decision meant Microsoft was shifting to slow-growth mode. "Look at the results," Connors replied. "This is still a growth company."

Microsoft reported that its revenue grew to $8.54 billion in its fiscal second quarter, which ended last month, up 10 percent from the year-earlier second quarter. That was slightly below the analysts' consensus estimate of $8.59 billion in revenue, but profit exceeded Wall Street's expectations.

Microsoft's net income was $2.55 billion, or 47 cents a share. Excluding one-time charges to help pay for class action settlements and writing down investments in companies, Microsoft earned 53 cents a share. The Wall Street estimate was for 46 cents a share from continuing operations.

Revenue from its desktop Windows operating system business was about flat compared with the year-earlier quarter. But the year-ago period benefited from including the introduction of its Windows XP product.

Sales of software used to run corporate networks and databases - so-called server software - rose 12 percent as Microsoft continued to gain market share in the corporate computing market. Its huge productivity software segment, led by Microsoft Office, grew 8 percent to $2.29 billion.

Advertising on its MSN online sites increased 40 percent. And sales of its Xbox video game consoles were somewhat lower than the company projected, which actually helped Microsoft's earnings because the company loses an estimated $75 to $100 on each console sold.

Microsoft executives offered a cautious outlook for the current quarter, saying it would likely report revenue of $7.7 billion to $7.8 billion and earnings of 47 cents or 48 cents a share, about in line with analysts' expectations.

Microsoft executives called the general PC market "still pretty soft." But a report yesterday by IDC, a research firm, suggested that a gradual recovery is under way. Worldwide PC shipments rose 4.9 percent in the fourth quarter of 2002, and shipments in the United States rose 6.6 percent in the quarter, helped by solid consumer sales in the holiday season.

The current growth rates are meager compared with the high-growth days of the late 1990s, when gains were more than 20 percent annually, but the fourth-quarter numbers appeared to be an encouraging sign.

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