Microsoft to buy back $40bn of shares

Microsoft on Thursday reported profits that were just ahead of analysts' expectations, as the company announced a plan to buy back as much as an extra $40bn worth of its stock.

The software maker said it would buy back $20bn through a tender offer set to be completed on 17 August. The company said its board of directors has also authorised the company to buy back up to $20bn worth of stock through June 2011. The company said it has completed the $30bn stock buyback announced two years ago.

Microsoft chief financial officer Chris Liddell said in a statement: "With our share repurchase programmes announcement today, we reaffirm our confidence and optimism in the long-term future of the company and continue to execute on our strategy of returning capital to shareholders."

For its tender offer, Microsoft is using what is known as a modified Dutch auction, in which those who want to sell shares can indicate how many shares they want to sell and at what price. Microsoft said it will pay no more than $24.75 per share and not less than $22.50. The buyback offer, which is expected to begin today and run through 17 August, could see the software maker repurchase up to 808 million shares, or about 8.1 per cent of all outstanding shares.

On the profits front, the software maker said it earned $2.3bn, or 28 cents per share, on revenue of $11.8bn, for the three months that ended 30 June. That compares with profits of $3.7bn, or 34 cents per share, on revenue of $10.2bn for the same quarter a year ago.

The past quarter's results included legal charges that dented profits by 3 cents per share. Excluding the charge, the profits were a penny better than the 30 cents per share expected by Wall Street analysts and forecasted by the company in April. However, that outlook was a shock to analysts and investors, as Microsoft detailed plans to spend more to better compete against Google, among other things.

Microsoft's sales growth for the past quarter was its highest in two years. However, the company saw its profit dip significantly from a year earlier, as it followed through on its plan to pump money into developing new businesses.

Microsoft said it grew its staffing ranks 16 per cent overall, as it boosted development for both Windows and its online MSN and Windows Live businesses. It spent $197m on increased research and development for its Live services and for online advertising, and its Windows Client unit saw its workforce grow 13 per cent, a rise largely connected with efforts around Windows Vista.

Colleen Healy, Microsoft investor relations general manager, said in a phone interview: "We had a good finish to the fiscal year," noting that both revenue and profits came in above what analysts had projected. However, Microsoft's revenue forecast for the coming quarter was below what some analysts were looking for.

Microsoft's Liddell said on a conference call with analysts: "PC growth, while still healthy, is slowing." He forecast PC unit growth of nine per cent to 11 per cent for the first quarter, and eight per cent to 10 per cent for the year. In addition to relatively slower PC sales growth, Liddell said Xbox sales will see slower growth in the first quarter.

Healy did say Microsoft's balance of unearned revenue - money taken in for purchases accounted for in future quarters - rose to $10.9bn, "which really does speak well around customer excitement about the next version of Windows and Office," he said. What is less clear, of course, is when those products will come. Microsoft has said to expect Windows Vista in January, though many analysts are sceptical the operating system will be ready by then. Development work on Office 2007, meanwhile, had been slated to be wrapped up by October but has been pushed out to the year end, casting doubt on its prospects for a January launch.

Liddell added: "We have our share of execution risks in the next year."

For the current quarter, Microsoft said to expect revenue in the range of $10.6bn to $10.8bn, with per-share profits between 30 cents and 32 cents. Analysts were expecting revenue of $10.9bn and per-share profits of 31 cents.

Looking to the full fiscal year, which runs through June 2007, Microsoft said to expect revenue between $49.7bn and $50.7bn and diluted profits per share somewhere between $1.43 and $1.47.

Included in that outlook is significant spending, such as $450m in product launch and marketing costs when Microsoft updates its two flagship products, Windows and Office.

Another $450m is earmarked for growth in sales force and general marketing, plus $1bn for development of "high-growth products and new products and services". Another $500m will go to online services investments, including its AdCenter ad-serving tool, its search engine, Office Live, Live.com and its CRM Live service.

Word of the profits report and big buyback sent Microsoft's stock higher in after-hours trading. Shares changed hands recently at $24.17, up $1.32, or 5.8 per cent, from the close of regular trading. Ahead of the report, Microsoft closed at $22.85, a drop of 55 cents, or more than two per cent.

Meanwhile, Microsoft has been continuing a companywide reorganisation that began last September. Earlier this week, the company said it would shift from reporting financial results for seven to five business units, combining the results of its two smallest units with other businesses.

Ina Fried writes for CNET News.com