Microsoft posts higher profit
Strength in database software, gaming pushes earnings, sales above Wall Street's estimates.
By Grace Wong, staff writer

NEW YORK ( -- Microsoft's sales and profits jumped in the latest quarter, helped by strong results for database software and its gaming business, but the world's largest computer software maker gave a disappointing forecast for the current quarter.

Microsoft stock initially edged lower in after-hours trading on the earnings news before bouncing back.

Microsoft shares have rebounded from a 52-week low hit in June.

The company said Thursday that net income rose 11 percent to $3.5 billion, or 35 cents a share, in its fiscal first quarter ended Sept. 30. That's up from $3.1 billion, or 29 cents a share, a year earlier. Sales also jumped 11 percent to $10.8 billion.

Wall Street analysts had expected the company to post earnings of 31 cents a share on revenue of $10.7 billion.

"The solid revenue results for the quarter were at the top end of our expectations and represent a very good start to the fiscal year," Microsoft chief financial officer Chris Liddell said in a statement.

The company's server and tools business posted a 17 percent gain in sales. Revenue at its entertainment and devices division surged 70 percent, driven by sales of its Xbox gaming devices.

Liddell said during a conference call discussing the results that Microsoft has sold 6 million Xbox 360 video game consoles. Microsoft still loses money on each Xbox gaming console it sells, as it battles for market share with Sony (Charts) and Nintendo (Charts), but expects the segment to turn profitable by fiscal 2008.

The quarterly results were better than expected, but Microsoft also said a coupon program it announced earlier this week for upgrades to its Vista operating system would affect results for the current period.

Vista coupons

On Tuesday, Microsoft said it would offer coupons allowing customers buying a PC that runs Windows XP in the next few months to upgrade to Windows Vista once it becomes available.

As a result, Microsoft said it expects to defer about $1.5 billion of revenue from the second quarter to the third quarter. Microsoft said second quarter revenue should range from $11.8 billion to $12.4 billion. Analysts had forecast sales of $13.5 billion.

Microsoft, however, raised its full-year revenue guidance to a range of $50 billion to $50.9 billion, topping consensus analysts' estimates of $50.2 billion for fiscal 2007.

The lower second-quarter guidance shouldn't have much impact on full-year results as long as the company is able to maintain its product launch timeline, said Bill Schultz, chief investment officer at money manager McQueen, Ball & Associates, who manages portfolios that contain Microsoft shares.

"The real question for them is how they execute on the new product releases they have scheduled for Vista and Office 2007," he said.

Microsoft (Charts) is slated to release Vista, its first update for the Windows operating system in five years, to consumers in January. It also is expected to debut its latest Office software suite next year.

Analysts are hoping those new products will drive growth in its core software business next year.

Microsoft also is looking to grow its Internet services business, but it has been struggling against established players like Google (Charts) and Yahoo (Charts).

In the latest quarter, Microsoft said sales in its online services division, which includes its MSN Internet unit, fell 4 percent to $539 million.

Liddell said the company could pick up more firms in the online space and expects acquisitions to play a role in driving growth.

The market for video sharing and social networking sites has been sizzling, reflected by the $1.65 billion Google recently paid for YouTube.

But while Microsoft is in the market to buy more companies, it's also extremely disciplined about its purchases, Lidell said. "We are selective about what we buy and what we pay for it," he said.

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