Here, in the midst of a record IT spending slowdown, the company grew its revenue by 26% and its pre-tax operating income by 40%. These numbers aren't flukes -- Microsoft hit a home run this past quarter.
The strong growth was, in no small part, due to the company's switch to annual subscription-based pricing of its software, which began in July. Microsoft's large business clients were "motivated" to switch to the subscription plan, or risk facing much higher prices when they renewed their licenses. Such strong-arm tactics caused consternation among many customers, but in the final analysis, they paid up. That's the power of a monopoly, and that's why Microsoft is underrated.
This new annual-fee form of software pricing is a boon for the company, positioning it to deliver very reliable revenues and earnings in the years ahead. Gone are the lumpy results and business uncertainty caused by one-time license fees. Now, whether Microsoft has a major innovation or not, the revenues and earnings keep rolling in. It's an investor's dream come true: a predictable, rising earnings stream.
Looking ahead, Microsoft is calling for fiscal 2003 (ending in June '03) revenue of around $32.4 billion, which would represent growth of 14.2%. Interesting that revenue growth is accelerating. Microsoft's fiscal 2002 revenue growth was 12.1%, which, itself, was higher than fiscal 2001's growth of 10.2%. This is some pretty nifty growth for a company often labeled "mature."
While Microsoft may not be mature, it's still innovating and growing. And, with over $40 billion in the bank, it's high time the company returned some of that cash to shareholders. A $1-per-share annual dividend would be a good start, requiring only about one-third of the company's current annual cash flow from operations. At the stock's current value of around $52.50, that would provide a healthy yield of about 1.9%.
With or without the dividend, Microsoft offers a decent value. Free cash flow over the past 12 months amounts to $2.74 per share (a figure that excludes stock option tax benefits). At $52.50, the stock trades for 19 times free cash flow. Then, of course, there's the $9.90 per share of cash and investments on the balance sheet. If we subtract out the cash and investments, the stock trades for only 15.5 times free cash flow. For a company with almost unparalleled dominance, that's a low price to pay.