Microsoft profit soars

By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney.com) -- Microsoft posted quarterly profit and revenue Thursday that soared from a year earlier, driven by sales from the October release of Windows 7, the company's newest operating system.

The software giant's stock rose less than 0.6% on the news in after-hours trading, after sliding almost 2% during regular hours.

Microsoft (MSFT, Fortune 500) said its profit climbed 60% from a year earlier to $6.7 billion, or 74 cents per share, in the three months ended Dec. 31. The Redmond, Wash.-based company's sales snapped a three-quarter streak of declines, jumping 14% to a record $19 billion.

The results included deferred revenue of $1.7 billion from presales of Windows 7 and from the "Windows 7 upgrade option program," which gave some Vista owners coupons to upgrade to the newer operating system.

Excluding that boost, Microsoft said it earned 60 cents per share. Analysts polled by Thomson Reuters were expecting earnings of 59 cents per share. Without the deferred revenue, sales rose 4% and totaled $17.3 billion.

"Exceptional demand for Windows 7 led to the positive top-line growth for the company," said Peter Klein, chief financial officer at Microsoft. "Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth."

Even without the surge in revenue, Global Equities Research analyst Trip Chowdhry said Microsoft's earnings were "fabulous, because they did well in every dimension."

Where the profits are

Sales in the operating system division, which includes Windows 7, rose nearly 70% during the quarter, and profit doubled. Microsoft said it has sold more than 60 million licenses for the Windows 7, making it the fastest-selling operating system in history. The company said sales were lifted by an uptick in PC sales of around 15%, with consumers leading the charge.

During a conference call with analysts, Klein said that although business spending remained flat during the quarter, consumer spending increased more than expected.

Other divisions churned out profits, but mostly through cost-cutting initiatives. A year ago, Microsoft announced the first mass layoffs in the company's 35-year history. The company expects to complete the elimination of 5,000 positions by the middle of this year.

The company's headcount at the end of the quarter was 8% lower than it was a year ago.

Revenue from Microsoft's entertainment and devices division, which includes the Xbox 360 and Zune HD, fell 11%, but profit almost tripled.

The company's server unit revenue rose 2%, while profit climbed 8%. Chowdhry said the division's revenue and profits will continue to trend upward as Microsoft introduces new products in the space.

Klein said said that spending should pick up from recessionary levels and drive growth in the company's server market as companies refresh their hardware in 2010.

Microsoft's online services business division, which includes MSN and its new search engine Bing, failed to post a profit. Sales fell 5% as the division lost $466 million. Klein said Microsoft is pleased with Bing's momentum: The search engine has gained market share every month since its launch in May.

But Chowdhry said the division isn't Microsoft's primary concern.

"It will take time for the online sector to see some improvement, but Microsoft's focus is operating systems and servers and tools," he said. "The online business is just a flanking strategy. I don't think there will be significant movement forward."

Microsoft's search deal with Yahoo (YHOO, Fortune 500), which aims to challenge Google's (GOOG, Fortune 500) dominance in online search, is expected to launch early this year. To top of page

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