Friday, July 21, 2006 - Page updated at 12:00 AM

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Microsoft to whittle cash pile for $40 billion stock buyback

Seattle Times technology reporter

Microsoft has found something to do with the $34.1 billion in cash it has sitting around.

The company said Thursday it will buy back stock worth up to $20 billion next month, part of a $40 billion repurchase plan the likes of which some investors have requested.

The plan, announced along with quarterly earnings down 24 percent from a year ago, comes on the heels of a $30 billion stock repurchase completed during the past two years.

"Obviously, the buyback's a very large number, so we like to see that," said Andy Miedler, an analyst with Edward Jones, who does not own Microsoft stock.

Microsoft reported profit in its fiscal fourth quarter of $2.83 billion, or 28 cents a share, including 3 cents of legal charges related to a fine imposed by the European Union. That's down 24 percent from the same period last year, when the company earned $3.7 billion, or 34 cents a share, including 5 cents of legal charges and 9 cents of tax benefits.

Microsoft's revenue for the quarter was $11.8 billion, up 16.2 percent on strong sales of its Xbox 360 game console and its server and business software.

For the full fiscal year, Microsoft earned $12.6 billion, up 3 percent from 2005, on $44.3 billion in revenue.

The first half of the stock repurchase plan will likely boost earnings per share in the 2007 fiscal year by 5 or 6 cents, to $1.43 to $1.47, as company profit is distributed across fewer shares, said Microsoft Chief Financial Officer Chris Liddell.

"We create value by buying at prices that we think are very good," Liddell said in a phone interview.

Some analysts do not expect the buybacks alone to lift the company's stagnant stock price in the long term.

"The only way that Microsoft's stock is going to become attractive again is if Microsoft can actually begin to deliver growth," said Mark Stahlman, an independent analyst who does not own shares in the company. "If Microsoft is not a growth company, then the stock is not likely to go anyplace."

Company shares have lost 16 percent — $4.36 apiece — since March 31. Chief Executive Steve Ballmer has been criticized for not doing more to ignite the stock price.

In late spring, he went before Wall Street analysts to defend the company's spending plans but did not indicate a broader buyback was in the works.

The stock fell 55 cents Thursday, ahead of the earnings announcement.

But the shares gained 5.5 percent, or $1.26, to $24.11 in after-hours trading, tracking toward the upper end of the $22.50-to-$24.75 range within which Microsoft will buy back shares in a tender offer next month.

In that offer, the company will buy up to $20 billion worth of shares in a "Dutch auction" style arrangement in which investors can submit the number of shares they're willing to sell at a given price. The auction expires Aug. 17.

The company will set a price at which it will purchase as many as 808,080,808 shares, roughly 8.1 percent of its outstanding shares.

In the rest of the program Microsoft outlined Thursday, the company's board authorized an additional $20 billion in buybacks at management's discretion until June 30, 2011.

Brendan Barnicle, an analyst with Pacific Crest Securities, said ho-hum revenue predictions for the 2007 fiscal year, which began July 1, should be of greater import to investors than buybacks.

Microsoft forecasts growth in the high single- to low double-digits for most of its business segments, with the exception of the Entertainment and Devices Division, which is expected to grow more than 31 percent.

Companywide, Microsoft is expecting fiscal 2007 revenue in the range of $49.7 billion to $50.7 billion, up 12 percent to 14 percent from $44.3 billion in fiscal year 2006.

"[That's] not dramatic growth, which has been the case at Microsoft for quite a while, and buying back stock won't really address that," said Barnicle, who does not own Microsoft stock.

Microsoft is investing heavily across its businesses but is paying particular attention to the high-growth area of Internet services, where one of its chief rivals, Google, is dominant.

The company surprised Wall Street last quarter when it projected an additional $2.7 billion in operating expenses this year. Liddell detailed those expenses Thursday:

• $500 million will go to the company's Internet services strategy to compete with Google, Yahoo! and others. It will go toward content to drive display advertising; improve its search and adCenter system; and purchase equipment and build data centers such as one being constructed in Quincy, Grant County.

The company's MSN group, which houses its advertising efforts, saw quarterly revenue dip 3 percent to $588 million.

• $450 million to launch Windows Vista and Office 2007 and market Xbox 360 during the holidays. Microsoft has sold 5 million consoles and aims to sell 8 million to 10 million more by the end of fiscal 2007.

• $450 million to go toward sales and marketing, including an expansion of the sales force.

• $1 billion on high-growth businesses and the 750-person research arm. This area includes the company's efforts in unified communications, business intelligence and high-performance computing, as well as unannounced products.

• $300 million on general cost increases and acquisition expenses.

The company will provide more detail on "the strategic nature" of its investments during a financial analysts meeting next Thursday in Redmond, Liddell said.

It should have updated employment figures at that meeting, according to a spokesman.

Ballmer said last month Microsoft has more than 70,000 employees. More than 30,000 work in Washington state.

Benjamin J. Romano: 206-464-2149 or

Copyright © 2006 The Seattle Times Company


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