What's in Microsoft's Future?

Rick Aristotle Munarriz (TMF Edible)

If Microsoft(Nasdaq: MSFT) isn't tired after reaching deep into its pockets for its $75 billion payday earlier this week, it has to be longing for some rest after announcing its June quarter results last night.

The world's leading litigation magnet and software company wrapped up fiscal 2004 by delivering $0.25 a share in earnings in its final quarter on a 15% uptick in revenues. Backing out onetime charges and a tax benefit, the bottom line doubled for a $0.28-a-share showing.

How serious the company's pledge to buy back $30 billion in stock may be put to the test as the stock fell in after-hours trading. Wall Street was hoping for more and wasn't impressed with the company raising its revenue targets for the new fiscal year while lowering its profit projections.

But what was the market expecting? Surely, the same investors who bid up the stock on Wednesday on the news of a $3-a-share onetime dividend had to realize that paying out more than $30 billion in one lump sum -- roughly half of the company's $60.6 billion cash balance -- would take a bite out of the easy investment income the company produced every year. Over a quarter of its pretax profits last year came from interest it was earning on its idle cash. If investors wanted their hands on it so badly, why are they so shocked to see Mr. Softy without makeup?

The fact that the company is looking to earn at least $1.05 a share this year isn't too shabby, depending on the eventual timing of the pudgy distribution. On an ex-dividend basis, it actually gives the stock a lower P/E multiple than the original bottom line forecast. If the market takes the stock much lower, I think Microsoft would be well advised to do away with the $3-per-stub distribution and simply double the size of the stock buyback and repurchase 20% of its outstanding shares.

Income investors may disagree with me on that. They may very well relish the possibility of such cash-rich companies as Intel(Nasdaq: INTC), Apple(Nasdaq: AAPL), and EMC(NYSE: EMC) following suit with sizable shareholder distributions.

But it won't be the first time I'm in the minority. So, even though the market is dusting off the confetti in its hair and walking away empty, I'm looking forward to fiscal 2005 and its propped-up range of $38.4 billion to $38.8 billion in revenues.

Happy New Year, Mr. Softy. Need a ride home?

Longtime Fool contributor Rick Aristotle Munarriz doesn't mind being the designated driver at New Year's Eve parties. It gives him that much time to break his New Year's resolutions. He does not own shares in any companies mentioned in this story.

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Overstock Channels Mao

Bill Mann (TMF Otter)

Last Monday, I detailed in A Perfect Earnings Report a model of disclosure that I seek from companies offering their quarterly results. With the exception of one thing, Overstock.com's(Nasdaq: OSTK) most recent report did mine one better.

Look, the way I see it, the more Chairman Mao quotes you can cram into an earnings report, the better. Overstock CEO Patrick Byrne only manages one. I'm sure he'll endeavor for more next time. I'll get this out of the way: The one thing that's missing here is the cash flow statement. Particularly with companies that are unprofitable, I don't see how providing cash flows with some of their sources and uses granularity could be anything but helpful.

Go. Read the letter. Note the fact that good stuff is elucidated, bad stuff is laid out on the table, and there is none of the sepia-toned "everything is hunky-dory, except where the weather impacted results" blather that you read in so many letters to shareholders. Note also the most important part of Byrne's letter: The thing you will likely never see discussed anywhere else is the part about "constraint theory." Companies that grow rapidly simply do not bother to tell you about the challenges in prediction that this can pose. Overstock grew its core revenues 120% over last year. This means that the company had to prepare for the growth, determining in advance what facilities would scale and what ones demanded rapid, predictive investment. Had the company "only" grown 50%, some of these investments would have been wasted. On the other hand, had it only modeled for 50% growth, its top line would have been deeply impacted.

All told, the company lost $0.13 per share, or $2.3 million. GAAP revenues increased to $87.8 million from $28.8, well higher than expected. Overstock does not provide guidance, and it also went to great pains to note that due to a change in accounting policy that investors ought not take this 200%-plus gain at face value. This though the outward impression (and the one reported by every other news service thus far) of better revenue gains likely would have helped the company's stock.

Overstock was an inaugural selection of the Motley Fool Hidden Gemsnewsletter, chosen last June. Its returns have been extraordinary. While the company continues to be unprofitable (overkill hint: cash flow statement would help), it has shown the ability to manage its growth in spectacular fashion.

For next quarter's quote, if nothing relevant from Mao is available, might I suggest Kierkegaard? I'm sure that would slay 'em.

For more Fool coverage on Overstock.com, read:

Overstock Letter, by Bill Mann
Overstock Rates the Competition, by David and Tom Gardner

Bill Mann owns none of the companies mentioned in this story.

Discussion Board of the Day: Video and PC Games

How does EA stack up with Activision, Sega, and the rest of the field? Will Sega's newest football contribution convert Madden followers? Talk with other gamers in the Video and PC Games discussion board. Only at Fool.com.

Amazon Stays Strong

Phil Wohl

Seeing my first published book, The Rivalry, on Amazon.com(Nasdaq: AMZN) the other day really put a smile on my face. The tale, which is based on my high school basketball escapades, also reveals my Junior Prom date with a girl my friends used to call "The Amazon." I was so nervous that night that my 16-year-old mind made me run to the nearest pay phone and call my dad to save me from the clutches of this towering teenager.

Fast-forwarding to today, I freely shop on the Amazon.com website with no remnants of paranoia over the company's name. I've bought everything from cake mixers to books to sneakers on the popular site and have never paid for shipping costs, thanks to Amazon's Free Super Saver Shipping program. My experiences have always been so positive on the site that I can't imagine my life without the company.

Investors know that Wall Street is totally consumed with earnings; the fine line between missing and beating analysts' expectations typically determines whether a stock will get hammered or pushed up around earnings time. True to form, Amazon's second-quarter earnings missed the consensus forecasts by a penny, which sent the stock down nearly 9% in early trading today. Amazon's now trading at around $41 a share, substantially off its 52-week high of $61.15.

Earnings per share for the second quarter grew to $0.18 a share from a prior-year loss of $0.11 a share (excluding items, that 2003 figure was a profit of $0.10 a share). Sales grew 26% to $1.39 billion. The company said it met its own internal targets, that its revenue and earnings results were in the middle of the expected range, and that operating earnings were actually ahead of its projections.

Amazon has been around nearly 10 years, making it an old-timer in the New Economy. It still produces sales growth in excess of 25% combined with healthy, double-digit earnings increases. There aren't many established companies on Wall Street that can make that claim. Although the company competes with Barnes & Noble(NYSE: BKS) and eBay(Nasdaq: EBAY) on several of its product lines, its all-in-one concept and free shipping is certainly unique.

The company generated a 45% increase in its free cash flow (to $354 million) on a trailing twelve-month basis, and it continues to plow cash back into the growth of its business. I usually look for industry leaders as prime investment candidates, and despite Amazon's one-cent shortfall, I still see the company as a tremendous long-term investment. David Gardner likely agrees with me, as he named Amazon.com a Motley Fool Stock Advisor pick in the October 2002 issue. The stock's returned 173% since then compared to the S&P 500's 22% gain.

Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.

Quote of Note

"Success in business requires training and discipline and hard work. But if you're not frightened by these things, the opportunities are just as great today as they ever were." -- David Rockefeller

Janus Hangs On

Tim Beyers

We've had some stormy weather in the Denver metro area over the past few days. Last night, we were supposed to receive a downpour of epic proportions. It did rain, but I'm not so sure the soaking was worthy of Homer. Maybe that's because the storm clouds were more focused downtown. Or, more precisely, directly over Janus Capital Group's(NYSE: JNS) headquarters.

The mutual fund manager said yesterday that second-quarter earnings declined nearly 20% to $40.5 million, or $0.17 per diluted share, from $50.5 million, or $0.22 per stub, during the same period a year ago. The results excluded a $228 million one-time gain from the sale of its shares in DST Systems(NYSE: DST) as well as charges related to debt restructuring, severance payments, and the mutual fund scandal. Investors bailed out, sending Janus' shares lower by more than 1% yesterday. They're down again nearly 2% today.

It isn't the first time investors have run for the exits, either. Since last September, when Janus, along with Bank of America(NYSE: BAC), Bank One(NYSE: ONE), J.B. Oxford(Nasdaq: JBOH), and Strong Financial -- whose assets have since been purchased by Wells Fargo(NYSE: WFC) -- was first implicated in the mutual fund scandal, average assets under management have declined from $151.4 billion to $135.4 billion, or 11%.

And yet in all that ugliness, there was good news. The company has reduced fees for investors, a mandated move that management says will impact future results by roughly $0.03 a share. Sure, the short-term hit stinks, but the lower fees should help satisfy regulators and bring investors back.

Janus' fund performance also continues to improve. As of June 30, roughly 55% of Janus investment funds ranked in the top half of their categories over the past three years, according to fund tracker Lipper. That's up from 33% at this same time a year ago. Among the winners driving the improved performance is 3-year-old Janus Global Opportunities, which ranks 11th of 259 funds over three years in its Lipper category. Morningstar also gives the fund a five-star rating.

Fellow Fool Rick Munarriz has asked that you and I forgive Janus. I'm not sure I do, but who cares? What's important here is that Janus appears to be making a real effort to repair the damage done to investors and the company.

Yeah, it's raining over Janus now, but I've got a good umbrella. I think I'll stick around for a while. You never know when the sun might peek through.

Fool contributor Tim Beyers actually has some faith that Janus will get back on its feet. Tim owns no shares in any of the companies mentioned, and you can view his Fool profile here.

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