Analysts had been watching this quarter for signs of how Microsoft might better use its cash hoard of nearly $41bn. In a Wednesday research note, Deutsche Bank analyst Brian Skiba estimated Microsoft's cash stash would reach $53.5bn by the close of fiscal 2003 in June and top $85bn in fiscal 2005. Skiba saw four major options for dealing with the cash: Buy back shares; make more acquisitions; increase lending through Microsoft Capital; or pay out dividends. Microsoft's decision to pay out an annual dividend comes as Congress considers approving a White House proposal to end investor taxes on dividends. "Declaring a dividend demonstrates the board's confidence in the company's long-term growth opportunities and financial strength," Connors said in a statement. "We are especially pleased to be able to return profits to our shareholders while maintaining our significant research and development efforts and satisfying our long-term capital requirements." But during a Thursday afternoon conference call, some financial analysts questioned the size of the dividend, considering Microsoft's cash on hand. "You could probably characterise our dividend as a starter dividend," Connors told financial analysts. He explained that Microsoft evaluated about 30 other companies paying out dividends. He indicated that Microsoft's board would continue to evaluate the dividend. Solving Microsoft's cash problem remains a major concern for Wall Street, particularly as the company prepares to unleash a torrent of new products this year. "Microsoft will release more new products in 2003 than ever before," Brendan Barnicle, a Pacific Crest Securities analyst, wrote in a research note on Wednesday. On tap: Windows 2003 Server, Exchange Server 2003, Office 11 and a new suite of server products code-named Jupiter, among others. "Historically (Microsoft) has spiked with new releases of Windows and Office," Barnicle wrote. At the same time, Microsoft continues to benefit from unearned revenue, which is like having sales in the bank for upcoming quarters. The company ended the second quarter with $8.83bn in unearned revenue. During the first quarter, unearned revenue swelled to $9.13bn, mostly from licensing, up from $5.85bn a year earlier. The majority of unearned revenue comes from software licensing, but not all. Microsoft also includes undelivered items, such as software moved through retail or technical support, in the mix. The non-licensing category accounts for anywhere from 10 percent to 25 percent of unearned revenue. Analysts also seemed hopeful about a Microsoft programme that could diminish the threat of Linux and other open-source software from stealing customers from Windows. On Tuesday, Microsoft revealed that some governments would gain access to the Windows source code. "The program is a pre-emptive move to prevent the replacement of Windows by Linux within government agencies, Microsoft's most-threatened vertical," Thomas Weisel Partners analysts Robert Schwartz and Tim Klasell wrote in a Wednesday research note. "This announcement demonstrates Microsoft's capability to defend and maintain its monopoly when the competition is feature-rich and free." Connors told financial analysts that Linux remains a serious threat to Microsoft's server business. "The ramifications of free software to our business model should be obvious to everyone," he said. The dividend is payable on 7 March to shareholders of record on 21 February. The split is expected on 27 January.
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