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Microsoft says server software boosts quarter

Net income climbs 11%. The company says a revenue deferral will lower earnings in the current period.

October 27, 2006|From the Associated Press

Microsoft Corp.'s fiscal first-quarter earnings rose 11%, exceeding Wall Street estimates, as the company said it benefited from stronger sales of server software and some cost savings.

Microsoft also had higher-than-expected revenue from the unit that includes the Xbox video game console.

For the three months ended Sept. 30, Microsoft said it earned $3.48 billion, or 35 cents a share, compared with $3.14 billion, or 29 cents, in the same period last year. The year-earlier results included a one-time legal charge of 2 cents a share.

The Redmond, Wash.-based company said revenue for its fiscal first quarter was $10.81 billion, an 11% increase over $9.74 billion a year earlier.

Analysts polled by Thomson Financial had expected earnings of 31 cents a share on revenue of $10.75 billion.

The earnings report was released after the close of regular trading. Shares of Microsoft rose 4 cents to $28.35 during the regular session and was little changed in after-hours trading.

Chief Financial Officer Chris Liddell said net income was boosted by higher-than-anticipated investment income. He said Microsoft also was able to reduce spending in the just-ended quarter, but he warned that some of the savings would be spent in the current quarter instead, on marketing and other efforts.

For its current fiscal second quarter, which ends Dec. 31, Microsoft said it expected per-share earnings of 22 cents to 24 cents. The company said the results would be about 11 cents less than it might have been because it expected to defer about $1.5 billion in revenue to its fiscal third quarter.

Microsoft expects to defer the revenue because of a plan to offer buyers of computers over the next few months coupons that will be good for free or discounted upgrades to the new versions of its Windows operating system and Office software.

After many delays, Windows Vista is due to be released to home users in January. Microsoft and computer makers are offering the coupons in the hopes that people won't wait and will buy new Windows-powered computers as holiday gifts.

Microsoft said that after deferring the $1.5 billion, revenue for its second quarter would be $11.8 billion to $12.4 billion.

Analyst Sid Parakh at McAdams Wright Ragen said that although analysts were warned two days ago of the revenue deferral, some might not have been expecting the effect on earnings to be quite so high.

Microsoft now expects earnings of $1.43 to $1.46 per share for its full fiscal year ending in June, a small revision to a previous forecast of $1.43 to $1.47.

But revenue for the 12-month period is expected to be $50 billion to $50.9 billion, a slight increase over a previous forecast of $49.7 billion to $50.7 billion.

Liddell said the fiscal-year earnings forecast was lowered in part because the company's plan to buy back about $20 billion worth of shares wasn't as successful as anticipated and Microsoft was able to buy back only about $4 billion in stock.

Analyst Alan Davis at D.A. Davidson said Microsoft, which is often considered conservative in its guidance, might exceed those forecasts.

"It's not a bad quarter, not a bad outlook," he said.

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