Microsoft Corp. earnings fell 17 percent in the latest quarter as the software giant took a $2.2 billion hit to compensate workers for their "underwater" stock options.
For the fiscal second quarter ended Dec. 31, Microsoft reported net profit of $1.55 billion, or 14 cents per share, compared with a profit of $1.87 billion, or 17 cents per share, a year earlier. (MSNBC is a joint venture of Microsoft and NBC.)
But revenues rose 19 percent from the year-earlier period to a record $10.15 billion, compared with the $9.7 billion analysts had been expecting. After adding back stock-based compensation expenses of about 20 cents a share, Microsoft's adjusted earnings of 34 cents per share exceeded the average analyst estimate of 30 cents per share, according to First Call.
Microsoft chief financial officer John Connors said he was very pleased with the quarter and especially with stronger-than-expected sales of personal computers.
"PC demand was much stronger than forecast in the United States and Europe, especially on the consumer side," he said in a conference call with analysts, which was broadcast over the Internet. The company said it was raising its forecast for PC shipments in the current fiscal year, which ends June 30, because of stronger demand among both consumers and businesses.
Revenue at Microsoft's MSN online division rose 19 percent, driven by strong ad sales, although the company is seeing a decline in revenue from dial-up subscriptions.
Microsoft said 18,500 employees, or slightly more than half of those eligible, took advantage of a program to buy back stock options that were significantly underwater, meaning that had a strike price of $33 or higher. The program ended last quarter when Microsoft stock was trading around $25.50 a share.
J.P. Morgan paid Microsoft slightly more than $1 a share for the 344.6 million options that were tendered, most of which was immediately passed on to employees. But Microsoft calculated its stock-related expense at $2.21 billion, or $1.48 billion after taxes. Microsoft's total stock-related compensation costs for the quarter were $3.23 billion, compared with $1.06 billion a year earlier.
Although Microsoft is not required to count stock-based compensation as an expense, many shareholder advocates long have called for companies to take such a step, and Microsoft announced it would do so last year.
Shares initially rose in after-hours trading following the release of earnings, then fell below their closing Nasdaq price. Shares in Microsoft fell to $27.29 in after-hours trade on Instinet from their Nasdaq close of $28.01.
(Reuters contributed to this report.)