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Microsoft's income beats expectations

This image provided by publisher Microsoft Corp shows Master Chief, the protagonist in the new video game Halo 3. Microsoft Corp reported strong quarterly sales growth yesterday, boosted in part by demand for the hit video game. PHOTO: AP

Microsoft reported strong quarterly sales and profit growth on Thursday, surprising Wall Street analysts with the sales of its core software products.

The world's largest software maker continues to trail well behind Google in the new markets for Internet services and online advertising. But the new versions of its lucrative personal computer businesses -- the Windows Vista operating system and Microsoft Office 2007 -- appear to be selling better than analysts expected.

Microsoft, which reported its results after regular trading on the stock market closed, raised its financial forecasts for the current quarter and its fiscal year, which will end next June.

In after-hours trading, Microsoft shares jumped nearly 12 percent to US$35.76 a share. In the regular trading session, the company's shares closed at US$32.01, up US$0.76 for the day.

For its first quarter, Microsoft reported net profits of US$4.29 billion, or US$0.45 a share, up 23 percent from a year earlier. Analysts had predicted US$0.39 a share.

Microsoft reported revenue of US$13.76 billion, an increase of 27 percent from a year earlier. The consensus revenue estimate of securities analysts, compiled by Thomson Financial, was just under US$12.6 billion.

In an interview, Microsoft chief financial officer Christopher Liddell said the company had "outperformed expectations pretty much across the board," led by the performance of its personal computer software products. Sales in the Windows group rose 25 percent to more than US$4.14 billion, while the Office division reported a 20 percent increase in sales to US$4.11 billion.

Liddell cited three factors for the exceptionally strong performance of the desktop products. The sales of personal computers worldwide grew 14 percent to 16 percent, he said, compared with the company's anticipated range of 10 percent to 12 percent. Growth was highest, he added, in consumer and international markets, especially in developing economies like China, India, Russia and Brazil.

Microsoft also sold more of its premium-priced versions of Windows and Office than a year earlier. Liddell also said the company's efforts to combat piracy were particularly successful, increasing sales of some product lines by as much as 5 percent from a year earlier.

"It's only one quarter, so we're not getting carried away here," Liddell said. "But the anti-piracy really helped."

Microsoft got another solid quarter from its server software group, which in recent years has become the company's third big, profitable business alongside Windows and Office. Server products are the back-end software in corporate data centers that run e-mail systems, databases and corporate applications. Server software sales for the quarter rose 16 percent to US$2.9 billion.

Microsoft's sales also got a healthy lift from its entertainment and devices unit, helped by the introduction of the hit video game Halo 3. Revenue from the entertainment and devices group rose 90 percent to US$1.9 billion. And after years of losses, the unit reported a pretax profit of US$165 million, compared with a loss of US$142 million a year earlier.

The mainstay businesses are thriving, but analysts say future growth will increasingly depend on how well Microsoft can do in selling online advertising and developing Internet services. This model of delivering software, information and entertainment over the Internet to personal computers, cellphones and other devices, sent from huge data centers, is often called "cloud computing." Google, the search giant, is the runaway early leader.

"Strategically, looking forward, the challenge for Microsoft is cloud computing and Google," said David Mitchell Smith, an analyst at the research company Gartner.
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