By Martin Wolk Executive business editor
updated 7/23/2004 12:48:08 PM ET 2004-07-23T16:48:08

After pleasantly surprising Wall Street this week with plans for a huge dividend payout, software giant Microsoft Corp. disappointed investors Thursday with earnings that were slightly below expectations and cautious guidance for the next 12 months.

Microsoft said net income for its fiscal fourth quarter nearly doubled to $2.69 billion from $1.48 billion a year ago on revenue of $9.29 billion, up 15 percent from the year-earlier period. But net income for the quarter was boosted by a $208 million, one-time tax benefit.

After excluding the tax benefit and adding back in stock-based compensation expenses, Microsoft earned 28 cents a share in the quarter, compared with the 29 cents analysts were looking for on average. The company’s new guidance for fiscal 2005 also included a profit figure that was far lower than analysts had expected.

(MSNBC is a Microsoft-NBC joint venture.)

“It looks like the impact from this dividend is going to be bigger than any of us expected,” said Brendan Barnicle, an analyst with Pacific Crest Securities.

Microsoft stock fell in extended-hours trading after the earnings announcement was released.

Microsoft Chief Financial Officer John Connors called fiscal 2004, which ended June 30, a “banner year” that ended with a “great” quarter.

“We had a great quarter with 15 percent revenue growth as all of our businesses met or exceeded our expectations and our progress on cost efficacy delivered higher operating margins overall,” he said in a statement. Among the accomplishments of the year just ended, Connors highlight the fact that the company resolved “a significant portion of our legal exposure,” allowing it to distribute much of the cash it has been amassing for years.

Over the past year the company settled a long-running lawsuit with rival Sun Microsystems and paid a $611 million fine to the European Commission for antitrust violations, although the case is being appealed.

Microsoft also highlighted strong growth of its Office business software and its Windows Server systems for back-end computers. And the company said its MSN division, launched in 1995, posted its first profitable year with an operating profit of $121 million, compared with a loss of $567 million last year.

For fiscal 2005, Microsoft said it expects revenue of $38.4 billion to $38.8 billion, right in line with expectations and up about 5 percent from the $36.8 billion posted in fiscal 2004. Net income is expected to be between $1.05 and $1.08 a share, including stock-based compensation of about 16 cents a share.

That is far short of published estimates based on guidance the company offered in April, when executives projected net income of $1.16 to $1.18 a share for fiscal 2005. In a conference call broadcast over the Internet, Connors said the difference was largely due to an expected decline in investment income due to plans for the huge payout.

Microsoft already is seeing lower returns on its large cash stockpile due to a shift into more conservative investment vehicles in preparation for the payout, he said. Alan Davis, an analyst at McAdams Wright Ragen, said that shift also was the main reason Microsoft fell short of profit estimates in the just-ended fourth quarter. As the company shifted some of its money to safer vehicles, it was forced to take a loss on derivatives used to hedge against investment risks.

He said Microsoft's operating results actually were better than expected. "I think the Street was caught maybe a little bit off guard by the double whammy of having less cash earning interest (going forward) and having that cash in more liquid investments that are going to earn less," he said.

Microsoft surprised Wall Street this week by announcing plans for a one-time special dividend of $3 a share, a $32 billion payout to shareholders that is the largest ever offered by a U.S. company.

Microsoft also said it would double its regular yearly dividend and buy back up to $30 billion in stock as a way to boost the company’s share price, which has been stuck in a narrow range for more than three years.

Until a few years ago, Microsoft executives resolutely refused even to consider paying dividends, arguing that in the fast-changing technology world they had to reserve cash for research and strategic investments.

But as Microsoft’s cash hoard grew beyond any conceivable use in even for major company acquisitions, shareholders pressured the company to return some of the cash to them. Consumer and shareholder activists even questioned whether Microsoft was legally permitted to hold so much cash.

As of the end of June 30, the cash pile had grown to nearly $61 billion. Microsoft expects to make the special payout in December, pending shareholder approval.

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