Office, Vista launches boost Microsoft sales

Company's third-quarter earnings top Wall Street estimates, but earnings outlook for the current quarter is slightly below some forecasts.
Written by Ina Fried, Contributor
In the first quarter to include consumer sales of Windows Vista and Office 2007, Microsoft reported earnings that topped Wall Street estimates.

Microsoft said Thursday that it earned $4.93 billion, or 50 cents per share, on revenue of $14.40 billion for the three months ended March 31. That compares with net income of $2.98 billion, or 29 cents per share, on revenue of $10.9 billion for the same quarter a year earlier.

The quarter's earnings were boosted by a 2 cent per share tax benefit and legal charges that dented per-share earnings by a penny. Excluding those items, the company would have posted earnings of 49 cents per share, ahead of the 46 cents that analysts were projecting, according to First Call.

In January, Microsoft said to expect revenue between $13.7 billion and $14 billion and per-share earnings of 46 cents or 47 cents.

Microsoft's revenue and profits included some money that was deferred from earlier quarters as part of a Vista upgrade program. The deferred money accounted for $1.67 billion in revenue and accounted for 12 cents per share in earnings.

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"This quarter marked the consumer launches of Windows Vista and the 2007 Microsoft Office system, and we are delighted with the positive customer response these products have received," Chief Operating Officer Kevin Turner said in a statement.

For the current quarter, Microsoft said it expects revenue to be in the range of $13.1 billion to $13.4 billion, with per-share earnings expected to be from 37 cents to 39 cents. Wall Street was projecting earnings of 40 cents a share on revenue of $13.31 billion, according to First Call.

Microsoft shifted some costs from the past quarter to this quarter, accounting in part for the fact the company's outlook is below what some analysts were expecting, Colleen Healy, Microsoft's general manager of investor relations, said in an interview.

The company also offered its first estimate for the new fiscal year, which begins in July. Microsoft said it expects revenue in the range of $56.5 billion to $57.5 billion, with per-share earnings in the range of $1.68 to $1.72. That's roughly in line with what many analysts had been projecting.

Microsoft said its online services business, which includes its MSN and Windows Live efforts, saw revenue grow 11 percent, with advertising revenue up 23 percent from a year earlier. Healy said Microsoft also saw, for the first time, its homegrown AdCenter ad-serving engine produce higher revenue per search than Microsoft had been getting when it used Yahoo's Overture service. Last quarter, Microsoft cut its outlook for the online business and said it was "not happy" with its search business results.

On the Xbox front, Microsoft said it sold 500,000 units. "We're just really delighted with where we are relative to the competition," Healy said.

PC sales for the industry grew about 1 percentage point more than Microsoft had been projecting, Healy said, with Office and Vista being well-received. "The reception they've received thus far really puts us off to a nice start."

Microsoft said that seven in 10 PCs shipped with a premium version of Windows in the quarter, as compared with about five in 10 under Windows XP. However, much of the shift was to Vista Home Premium, which carries far less extra profit, compared with Home Basic, than do Vista's business versions. All in all, the shift to higher-end versions of Windows accounted for 1 percentage point of the growth Microsoft saw in its sales of Windows for new PCs, Healy said on a conference call with analysts.

Microsoft told analysts it expects Vista to account for 85 percent of sales in fiscal 2008, with XP still amounting to 15 percent of sales. "We're optimistic, but we don't want to get ahead of ourselves," Healy said.

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