Microsoft Shares Rise on Results, Buyback

Shares of Microsoft were higher Friday after the software giant reported lower earnings — due in part to its standoff with European antitrust regulators — and said it would aggressively move to buy back as much as US$40 billion worth of its own stock.

Microsoft said profit for its fourth quarter fell to $2.83 billion, or 28 cents a share, down sharply from $3.7 billion, or 34 cents a year ago, in part due to a $351 million fine levied against the software company by EU regulators.

Optimistic Outlook

Revenue rose 16 percent to $11.8 billion, comfortably outpacing Wall Street forecasts of $11.6 billion.

Chief Financial Officer Chris Liddell said the quarter represented a “very strong finish” to Microsoft’s fiscal year and said customer demand remained high for a variety of its products in various markets, including the Xbox 360, SQL Server and its CRM product, Microsoft Dynamics.

In addition to the one-time charges, Microsoft’s profit lagged because much of the growth it experienced came in product lines that are not yet profitable, including the Xbox gaming console. In addition, some of its traditionally more profitable product lines — such as the core Windows franchise — are down as major new releases approach.

Also affecting profits is Microsoft’s aggressive spending plans, which the company said will include $2.4 billion in additional spending on marketing and sales for the Xbox and other product lines, and research and development of next-generation software, including Web search and mobile applications.

Those investments will create the “next wave of growth for the company,” Liddell said in a conference call.

Microsoft shares rose more than 4 percent in midday trading Friday to $23.86. The good news from Microsoft and Google, which blew past targets, was not enough to lift tech stocks, however, with a disappointing outlook from Dell overshadowing the positive results and dragging shares lower.

Cash in Action

Analysts hailed the move by Microsoft to buy back its own stock. Some have expressed frustration that the company has done relatively little with its massive cash stockpile, either by using it for strategic acquisitions or to return the cash to investors. The $40 billion buyback comes on top of $23 billion Microsoft said it returned to investors through buybacks and dividends during the just-closed fiscal year.

The repurchase plan will help Microsoft’s per-share earnings in the coming fiscal year as well, with the company raising its forecast to between $1.43 and $1.47 per share, up from $1.36 to $1.41, a range it gave in April. Sales were also forecast to go higher, with revenue coming in between $49.7 billion to $50.7 billion.

The buyback is just one of many now under way in the tech space — both Yahoo and eBay gave details on their own stock buyback programs this week — and, taken together, they seem to reflect a belief that technology shares are undervalued at current prices.

Among various business units at Microsoft, meanwhile, the MSN Internet arm continued to turn in weak performances, with sales in that division dropping 10 percent over the year before to $580 million. The unit also remains in the red, losing $190 million in the quarter, as Microsoft invests to revamp the unit to capitalize on growth in the advertising and search spaces.

Revenue in the Microsoft client unit, which includes Windows, grew 12 percent in the quarter to $3.4 billion, while server group sales rose 18 percent, to nearly $3.2 billion. The unit that sells Office and related productivity tools saw sales rise 6 percent to $3.1 billion.

New and Improved?

Microsoft is being closely watched by observers eager to judge the impact of several major developments, including the rise of Google as a threat on the Internet side, and the decision by founder and Chairman Bill Gates to step down from day-to-day duties at the company in less than two years.

Liddell said even if Vista, the debut of which has been pushed back repeatedly, is delayed by another quarter, pushing its launch into the middle of 2007, such a delay would not have a significant impact on revenue or profits. However, the decision to push the software debut back past the fourth-quarter shopping season may give competitor Apple an opening it is likely to take advantage of.

There appeared to be significant potential that Apple’s Mac line will “gain meaningful share in the back-to-school and holiday seasons while Microsoft Vista remains unavailable,” Merrill Lynch analyst Richard Farmer said.

Microsoft remains a company in transition, with the departure of Gates just the latest sea change and its Web-based software push representing a new way of doing business, noted Gartner analyst David Mitchell Smith.

“Microsoft reinvented itself 10 years ago when the Internet came along, but it’s a lot less agile than it was then,” Smith said. “Microsoft has matured a great deal as a company” but has also experienced growing pains, as evidenced by a series of deadline-misses on Vista and other products, he added. “What needs to come next is a clearer idea of how all this fits together into a single business model for the future.”