Microsoft jumps on buyback plan
Company will repurchase $20 billion worth of shares by Aug. 17. Quarterly results weak but slightly ahead of forecasts.
NEW YORK (CNNMoney.com) -- Microsoft's quarterly profit fell by 24 percent on higher costs and legal expenses, but the company announced a $40 billion share buyback program and issued a better than expected forecast for 2007, sending shares sharply higher in after-hours trading.
Microsoft (Charts) reported net income of $2.83 billion, or 28 cents a share, including a three-cent charge related to a fine levied by the European Union. Excluding the charges, earnings per share were 31 cents, a penny ahead of Wall Street analysts' expectations.
Microsoft reported sales of $11.8 billion, a 16 percent increase over the year-ago quarter; analysts expected $11.6 billion.
The company also announced a plan to buy back $20 billion worth of shares by Aug. 17 and authorized the purchase of $20 billion more through June 2011.
"That was exactly what they needed to do to give the stock a shot in the arm, and I'm very happy they're doing that," said Toan Tran, equity strategist at Morningstar. Tran does not own shares of Microsoft, and his firm does not do investment banking.
Shares gained 6 percent in after-hours trading. In the year-ago quarter, Microsoft reported net income of $3.70 billion, or 34 cents a share, including legal charges and tax benefits.
The buyback plan and revised 2007 guidance will likely come as welcome news to investors, as the stock has been stuck in a rut for several years.
Microsoft has been testing the patience of analysts and investors even more in recent months, first by delaying the launch of its long-awaited Windows Vista operating system and then announcing that expected operating income for the coming fiscal year will be about $2 billion shy of what analysts had estimated.
During the previous quarter's conference call, analysts were sharply critical of the company for the shortfall, which Microsoft attributed to higher than normal spending.
Microsoft's chief financial officer, Chris Liddell, gave clarity on the spending during a conference call on Thursday, breaking out how the money will be spent. Most of the costs are related to the company's increasing expectations for shipments of its Xbox 360 gaming consoles - Microsoft loses money on each unit shipped - as well as expenses related to the launch of Vista and investment in new areas.
Liddell said the company expects to ship between 13 to 15 million Xboxes.
Liddell said the company will spend $450 million on marketing costs related to the launch of Vista and another $450 million on expanding its sales force and marketing team. He reiterated that Vista for corporate customers will launch in November, while the consumer version will launch in January.
Liddell also said the company will spend another $1 billion on the development of high-growth areas such as business intelligence, servers and other areas to be announced in the coming year.
The company will spend another $500 million supporting its MSN division, which has struggled compared to Google and Yahoo! The company is in the midst of retooling that division. Finally, Liddell said Microsoft will spend another $300 million on higher expenses as well as potential acquisitions.
Improved Guidance for the Year
Tran of Morningstar said shares also got a boost from Microsoft's sales and earnings guidance for the coming fiscal year, which beat analysts' expectations.
The company said it expects earnings per share for the current fiscal year in the range of $1.43 to $1.47, higher than analysts' expectations of $1.40 per share and ahead of an earlier company forecast of $1.36 to $1.41.
The share buyback means the company will have fewer shares outstanding, which will boost earnings per share.
"The stock is likely to benefit from the somewhat better than expected results for the quarter, the positive guidance for next year ... and the benefits of the share repurchase program on the stock," wrote Goldman Sachs analyst Rick Sherlund in a note to clients. Sherlund, who maintains a "buy" rating on the stock, does not own shares of Microsoft, but Goldman Sachs has banking ties to the company.
Microsoft also said it expects revenue in the range of $49.7 billion to $50.7 billion. Analysts surveyed by Thomson FirstCall had been expecting $49.8 billion, and the company had previously forecast sales in the range of $49.5 billion to $50.5 billion.
For the current quarter, Microsoft announced that it is expecting earnings per share to fall in the range of 30 cents to 32 cents a share. The midpoint of that range meets Wall Street expectations of 31 cents. The company said it expects revenue for the quarter of between $10.6 billion to $10.8 billion, below expectations of $10.9 billion.
In the quarter, Microsoft saw healthy growth in its server and tools division. Sales for that division grew 18 percent from a year ago, fueled largely by a 35 percent sales gain for its SQL Server product.
Revenue in the home and entertainment division nearly doubled as the company addressed production problems related to the Xbox 360. Microsoft shipped 1.8 million Xboxes during the quarter.
In its client division, which makes the Windows operating system, Microsoft reported $3.38 billion in sales, a 12 percent gain from the year-ago quarter. The company cited continued PC demand as well as improved commercial and retail licensing results as the reason for the increase.
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