Microsoft's cash flow was $12.3b for the year ended 6/01 vs reported net income of $7.3b... while the average company in the DJIA had cash flow that was 25% LESS than net income. That is such a monstrous difference that it is not really worth discussing MSFT's PE relative to other companies. MSFT's profitability is absolutely awesome.
fyi:
When a customer purchases a Microsoft program, the company often defers a portion of the revenue related to
technical support and future enhancements. (It defers roughly 10-20% for a desktop application and 15-25% for a Windows desktop operating system.) However,
the company receives all of the cash from the sale upfront.
Tax savings from employee stock option exercises. When employees exercise options, the intrinsic value of the option becomes a tax deduction for the issuing company. This reduces the company's tax bill (of course individuals must pay taxes on the same amount, so there is no tax evasion). As Microsoft discloses the tax savings from option exercises, we can calculate the value that
employees received.
In fiscal 2001, Microsoft's tax savings from ESOs was $2,066 million. Using Microsoft's 33% tax rate, we can calculate that the value of the options that
employees exercised in fiscal 2001 was approximately $6,261 million. Using an estimate of the number of employees eligible to exercise options (given vesting schedules), we estimate that average option exercise value was
$250,000 per employee.
Microsoft's fiscal 2001 tax savings from ESOs was down sharply from fiscal 2000, when it was $5,353 million. The fiscal 2000 savings suggested that employees
realized $16,279 million in value-a staggering sum.
The size of these tax savings underscore the difference between Microsoft's reported tax rate and the cash taxes it paid. In fiscal 2001, the company
reflected a tax expense of $3,804 million on pretax earnings of $11,525 million
(33%). But if we net out the benefit of the ESO deductions and the deleterious
impact of deferred taxes, Microsoft's cash taxes were $2,158 million, or 18.7%
of pretax income (see Exhibit 1).
The results in fiscal 2000 were more dramatic. While the company's reported tax
expense was $4,854 million, the tax savings from option exercise-net of deferred
taxes-exceed $5,100 million. Said differently, Microsoft did not pay taxes in
fiscal 2000 as the value of the options that employees exercised (an expense for
Microsoft) easily surpassed the company's pretax profit.
source: CSFB |
