Microsoft beats profit forecast

NEW YORK — After Microsoft spilled thousands of words and streamed gigabytes of video to launch Windows 7 this week, one question remained: How well will the new operating system sell? The company's quarterly earnings report Friday gave signs that bode well for the company.

Microsoft's profit for the first quarter of fiscal 2010 beat analysts' expectations, boosted by strong sales of Windows and Xboxes, as well as cuts in operating expenses. Even though sales fell from the same period a year ago, the company said it had its best month ever in September for Windows license sales because of strong consumer demand.

"It was a very solid quarter for the Windows division, and with Windows 7 we have a great product for the recovering PC market," said Chief Financial Officer Chris Liddell on a conference call for the media and financial analysts.

Businesses, however, remain jittery about upgrading this year, and Microsoft expects them to stay that way through 2009. Even after Jan. 1, Liddell said, the increase in corporate spending could be gradual.

"It's a consumer-driven recovery and not enterprise driven as of yet," said Sid Parakh, analyst at McAdams Wright Ragen.

In response to the report, Wall Street drove the stock to a 12-month high Friday to close at $28.02, up 5.4 percent. The worst of the recession appears to be receding in the rearview mirror, the software giant said, and people are starting to buy computers again.

"While it is too early to tell, the fourth quarter of fiscal 2009 (ended June 30) might well have been the bottom of the economic reset," Liddell said.

Microsoft beat estimates with earnings per share of 40 cents, or $3.57 billion, while analysts had expected about 32 cents. Adjusted for deferred Windows 7 revenue — the free upgrade Microsoft offered to PC buyers leading up to Thursday — earnings per share were 52 cents.

Sales fell 14 percent to $12.92 billion in the first quarter, compared with $15.06 billion the same period a year ago. Adjusted for $1.47 billion in deferred Windows 7 revenue, sales added up to $14.39 billion, narrowing the decline to 4 percent.

Parakh said the results were "clearly much, much, much better than we thought."

While the sales were driven by Windows and Xbox, they were flat or worse in other Microsoft operations.

In the Windows and Windows Live division, previously named "Client," sales declined 38.8 percent to $2.62 billion. Including the deferred Windows 7 revenue, sales fell 4 percent. Operating income fell 52 percent to $1.46 billion, compared with $3.06 billion the same quarter a year ago. Overall, PC market growth was between zero and 2 percent.

The Business division, which generates half the company's profit, saw sales fall as well because of weak corporate spending, declining 11 percent to $4.4 billion.

Operating income was down 10.1 percent to $2.86 billion, compared with $3.19 billion a year ago. Liddell is hoping business spending picks up through the 2010 calendar year, when a new version of Office is scheduled to come out.

In the Server and Tools group, sales at $3.43 billion were flat from the same period last year. Operating income went up 22.9 percent to $1.28 billion from $1.04 billion a year ago.

The Online Services division, which includes search engine Bing, saw sales fall 3 percent to $490 million due to changes in the foreign-currency exchange. Bing's search revenue was up about 4 to 6 percent in the U.S.

The division continues to lose money — $480 million in the first quarter compared with $321 million a year ago.

Microsoft remains hopeful that the partnership with Yahoo will gain regulatory approval in early 2010.

At $1.89 billion, sales in the Entertainment and Devices division — Xbox, Zune and mobile — were flat from the same period a year ago. Operating income rose to $312 million from $159 million a year ago.

Attach rate, or sales of games per console, is 8.7, and 34 million consoles have been sold.

"Halo 3" was the No. 1 selling game in the U.S. in September, the company highlighted, and Xbox Live revenue increased 50 percent.

Across the company, Microsoft made $6.1 billion in operating cash flow and bought back $1.4 billion of the company's stock. The head count has shrunk 4 percent in the past year to about 91,000.

Overall, the company's tone was cautiously optimistic on Friday as analysts complimented the results.

"Our strategies will position us to take advantage of a recovering economy, which we hope to begin in the next calendar year," Liddell said.

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com