Microsoft plans massive stock buyback

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

"With our share repurchase programs 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," Microsoft Chief Financial Officer Chris Liddell said in a statement.

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 Friday and run through Aug. 17, could see the software maker repurchase up to 808 million shares, or about 8.1 percent of all outstanding shares.

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

The past quarter's results included legal charges that dented earnings by 3 cents per share. Excluding the charge, the earnings 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 percent overall, as it boosted development for both Windows and its online MSN and Windows Live businesses. It spent $197 million on increased research and development for its Live services and for online advertising, and its Windows Client unit saw its work force grow 13 percent, a rise largely connected with efforts around Windows Vista.

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

"PC growth, while still healthy, is slowing," Liddell said on a conference call with analysts. He forecast PC unit growth of 9 percent to 11 percent for the first quarter, and 8 percent to 10 percent for the year. In addition to relatively slower PC sales growth, Liddell said that Xbox sales will see slower growth in the first quarter.

Healy did say that Microsoft's balance of unearned revenue--money taken in for purchases accounted for in future quarters--rose to $10.9 billion, "which really does speak well around customer excitement about the next version of Windows and Office." 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 skeptical 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.

"We have our share of execution risks in the next year," Liddell said on the conference call.

Microsoft sold 1.8 million Xbox 360 consoles during the quarter, enabling the company to sell 5 million units for the past fiscal year. That was at the low end of its goal of 5 million to 5.5 million units. It predicted that 8 million to 10 million units will be sold in the current fiscal year.

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

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

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

Another $450 million is earmarked for growth in sales force and general marketing, plus $1 billion for development of "high-growth products and new products and services." Another $500 million 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 earnings 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 percent, from the close of regular trading. Ahead of the report, Microsoft closed at $22.85, a drop of 55 cents, or more than 2 percent.

Meanwhile, Microsoft has been continuing a companywide reorganization 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.