Windows sales carry Microsoft past 1Q forecasts

Consumer services and devices said to be fastest growing segment of company

Microsoft topped analysts' estimates in its first quarter Wednesday, earning $2.58bn (about £1.75bn), or 46 cents a share, on sales of $5.8bn. First Call consensus expected the software giant to earn 41 cents a share in the quarter. Microsoft shares closed up $1.31 to $51.75 ahead of the earnings report.

The $5.8bn in sales came in well above the consensus estimate of $5.69bn. In the year-ago quarter, Microsoft raked in $2.19bn, or 40 cents a share, on sales of $5.38bn.

The company reiterated previous guidance that called for year-over-year percentage growth in the low teens for second quarter revenue. The second half of fiscal 2001 should result in mid-teens percentage growth, CFO John Connors said, during an afternoon conference call with analysts. Microsoft expects to post full year revenue a few cents above the $1.88 per share currently predicted by First Call consensus.

Executives pointed to consumer services and devices as the fastest growing segment of the company. Microsoft sees that unit growing 35 percent in the second quarter.

Desktop software revenue in the December quarter should see high single digit percentage gains year-over-year, said Connors, who attributed the positive outlook to unusually strong sales of the Windows Me operating system. The company expects healthy retail demand for Windows Me during the holiday season.

However, second quarter sales of desktop applications will be slightly lower from the year-earlier period, Connors said. Office 2000 sales in the first quarter fell a bit year-over-year, largely because the comparable quarter in fiscal 2000 saw $150m from Office coupons, Connors said. If the effect of those coupons are subtracted from last year's results, Office revenue increased 5 percent year-over-year.

Microsoft may hold up .NET services as its future, but traditional operating system platforms continued to thrive in the third quarter, company executives said. "The current quarter represented the biggest Windows quarter in the history of Microsoft," Connors told analysts.

Revenues for NT Workstation and Windows 2000 Professional rose 30 percent over sales of comparable Windows NT products in the year-ago quarter, the company said. Microsoft didn't provide figures for Windows 2000 Server revenue, other than to say they increased, especially in September. A total of 11m Active Directory seats have been deployed, the company said.

The company didn't escape the European problems reported by many technology companies. Currency problems and slower PC growth cut about $100m from Microsoft's European business, Connors said.

Last quarter, Microsoft hurdled analysts' estimates, earning $2.41bn, or 44 cents a share, on sales of $5.8bn. Microsoft shares moved up to a 52-week high of $119.94 in December before falling to a low of $49.63 earlier this month. Twenty-four of the 26 analysts covering the stock rate it either a "buy" or "strong buy".

Mary Jo Foley contributed to this report.

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