Microsoft beats Street but cuts outlook

The software giant reports profit and sales that were bigger than what analysts expected, but lowers its guidance in anticipation of a slower economy.

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By Catherine Clifford, staff writer


NEW YORK ( -- Microsoft announced Thursday that revenue and profits rose in its fiscal first quarter thanks to strong sales in its server and business software segments.

Looking ahead, Microsoft (MSFT, Fortune 500) said that sales and earnings for the second quarter and full year would be slightly lower than consensus estimates due to the economic slowdown.

Microsoft's sales increased 9% to $15.06 billion in the three months ended in September, beating Wall Street's expectations of $14.78 billion, according to analysts polled by Thomson Reuters.

Net income rose to $4.37 billion, up nearly 2% from $4.29 billion in the same quarter one year ago. The company posted earnings per share of 48 cents, beating analyst expectations of 47 cents per share for the quarter.

Shares of the software giant initially rallied nearly 2.5% in after hours trading, but then gave up most of those gains to be little changed from the end of the regular trading day.

Microsoft is closely watched as a bellwether of the technology sector and there are concerns that consumers and businesses will cut back on spending if the economy continues to slow.

Microsoft said the slowing economy has affected its customers. "Our customers are asking how they can save money and do more with less," said Kevin Turner, chief operating officer at Microsoft, in a written statement.

But Turner stressed that the company is "uniquely positioned" to help its customers cut costs because its software can help improve productivity.

Microsoft's business division, online services, and server software divisions showed the largest sales growth in the quarter. However, the entertainment segment, which includes the Xbox 360 game console, reported a drop in sales from a year ago.

"It looks like it was a good quarter," said Richard Williams, senior software analyst at Cross Research. "They seem to have put up good results on most of the business segments, which is impressive," he added.

Microsoft lowered its guidance for the coming quarter and full year, but according to Williams, that was not surprising given the climate.

"I would have been very surprised if they didn't, just out of a sense of prudence given all the negative news that has been coming out in the last several weeks," said Williams.

Another analyst echoed the sentiment. "It would be pretty reckless of them to think that things would not get worse," said Walter Pritchard, analyst with Cowen and Company.

Pritchard said the company didn't really feel a pinch from the weak economic climate until the third month of its fiscal first quarter. "It doesn't really make a lot of sense to focus on how July and August were because things have changed quite a bit," he said.

Pulling in costs: On the conference call following the earnings release, Chris Liddell, senior vice president and chief financial officer of Microsoft, said that the company would be cutting costs to adapt to the slowing economic environment.

"Our approach will be to tailor our business to whatever the economy brings," said Liddell. "We will be agile not only to customer demand but also to our own patterns of spending." Lidell mentioned that one of the ways Microsoft would look to save money would be by reigning in hiring plans.

"For Microsoft, being mindful of costs just means slowing down on hiring because they have been pretty prudent on costs over the past couple of years," said Pritchard.

Looking forward, Liddell said he expected personal computer growth of 10% to 12% in the fiscal second quarter and 8% to 12% for the full fiscal year, which ends June 30.

"We are more cautious as the year goes on, not only about the level of growth," said Lidell, but also "the variability of that growth."

Guidance: Microsoft forecast that its fiscal second quarter revenue would be between $17.3 billion and $17.8 billion, which fell short of analyst's expectations for sales of $17.96 billion.

Microsoft said it also expects earnings per share to be between 51 and 53 cents per share in the quarter, lower than the 55 cents per share that analysts were looking for.

The company also lowered its full-year guidance to a range of $64.9 billion to $66.4 billion from the $67.3 billion to $68.1 billion range it gave in July. This adjustment brings Microsoft's guidance more in line with Wall Street's expectations of $66.51 billion in sales.

And Microsoft reduced its earnings per share guidance for the full year to a range of $2.00 to $2.10 from $2.12 to $2.18. This is a bit lower than analysts' predictions of a profit of $2.11 a share.

Shares of Microsoft, which rose nearly 4% Thursday, are down more than 40% this year.

Microsoft's news follows what has been a mixed bag of results for tech companies so far.

IBM (IBM, Fortune 500) and Intel (INTC, Fortune 500) have indicated that sales should hold up reasonably well in the fourth quarter. But earlier this week, Apple (AAPL, Fortune 500) gave a more conservative outlook about tech spending during the critical holiday shopping season.  To top of page

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