Microsoft announces share buy back

SEATTLE - Microsoft on Thursday lifted its full-year earnings outlook on strong demand for its new Windows operating system and announced plans to buy back as much as US$40 billion ($65.1 billion) of its stock, boosting its share price by 6 per cent.

The world's largest software maker said it would buy back 8 per cent of its shares for US$20 billion through a tender offer next month, and up to US$20 billion more through 2011.

The stock has underperformed every major US stock index since the start of 2003.

"This buyback is a big deal," said Richard Earnest, portfolio manger for HighMark Capital Management. "Microsoft has gotten cheap enough where this buyback will not be dilutive."

For the past quarter, Microsoft posted a 24 per cent decline in net profit, but beat Wall Street estimates after stripping out a US$351 million legal charge related to a recent fine from the European Union.

The software maker reported a net profit of US$2.83 billion, or 28 cents per diluted share, for its fiscal fourth quarter ended June 30. A year ago, Microsoft delivered a net profit of US$3.7 billion, or 34 cents per share, boosted by a tax gain.

Fourth-quarter revenue rose 16 per cent to US$11.8 billion.

Excluding the EU fine, Microsoft earned 31 cents per share. On that basis, analysts, on average, had forecast Microsoft to report a profit of 30 cents per share on revenue of US$11.6 billion, according to Reuters Estimates.

"Given the expectations after the first few companies reported, this one wasn't that bad. It had the potential to be worse than it was," said Romeo Dator, portfolio manager at US Global Investors.

Microsoft caught investors by surprise in April when it revealed plans to invest an additional US$2.6 billion to fund its flagging Web operations and other new businesses. The move had dampened optimism that new products and an online strategy shift would bear fruit this business year.

In the current year, Microsoft expects to earn between US$1.43 and US$1.47 per diluted share versus a previous forecast of US$1.36 to US$1.41 per share. The company also lifted its fiscal 2007 revenue forecast range by US$200 million and now expects sales of between US$49.7 billion and US$50.7 billion.

Microsoft said it raised the outlook due to strong orders for mew versions of its mainstay Windows operating system and Office business software due out in early 2007. Windows and Office products account for more than half its revenue and most of its profits.

For the current quarter, the company forecast diluted earnings per share of between 30 cents and 32 cents on sales of US$10.6 billion to US$10.8 billion, while analysts' average forecast was 31 cents a share on revenue of US$10.95 billion.

Since the company reported fiscal third-quarter earnings on April 27, the stock has fallen about 16 per cent versus a 5 per cent decline on the S&P 500 index.

But Microsoft shares were up 5.9 per cent at US$24.19 in after-hours trade after closing at US$22.85 on Nasdaq.

- REUTERS