Microsoft Profit Down, Beats Estimates

Microsoft Corp. custodial workers prepare signs promoting the upcoming release of the Windows Vista computer operating system Thursday, Jan. 25, 2007 at a company cafeteria in Redmond, Wash. The world's largest software maker is expected to report fiscal second-quarter earnings after the close of trading. Analysts polled by Thomson Financial expect Microsoft to earn 23 cents per share on $12.07 billion in sales. (AP Photo/Ted S. Warren) (Ted S. Warren - AP)

-- Microsoft Corp. shares got a bounce after the software maker posted fiscal second-quarter results that beat analysts' forecasts and offered encouraging signs about the fate of the new Windows Vista computer operating system.

Vista's long-delayed launch was largely to blame for Microsoft's 28 percent drop in profits in the last three months of 2006. Earnings fell to $2.63 billion, or 26 cents per share, from $3.65 billion, or 34 cents per share, during the same period last year.

Still, the results Thursday exceeded the 23 cents per share that analysts had expected from the Redmond, Wash.-based software maker, according to Thomson Financial.

Revenue rose to $12.5 billion, a 6 percent gain from $11.8 billion in the year-ago quarter. Analysts were expecting just shy of $12.1 billion.

Friedman, Billings, Ramsey & Co. analyst David Hilal called the performance "stellar." Such sentiments had Microsoft shares close up 15 cents at $30.60 on the Nasdaq Stock Market.

The latest editions of Microsoft's flagship Windows Vista and Office 2007, available for businesses since Nov. 30, do not hit the consumer market until Tuesday.

As a result, Microsoft's "client" division, responsible for Windows, posted a 25 percent drop in sales to $2.59 billion. The business division, which includes Office, saw a 5 percent drop to $3.51 billion.

The declines were expected, because Microsoft heavily deferred Windows and Office revenue from the second quarter to the current period. That was done to account for coupons that recent computer buyers got to let them upgrade their existing software to Vista and Office.

The deferrals trimmed $1.64 billion from Microsoft's second-quarter revenue and $1.13 billion, or 11 cents per share, from profits. If not for the deferrals, Microsoft said revenue would have leaped 20 percent in the quarter.

Previously, Microsoft had said the deferred revenue would be around $1.5 billion. Analysts interpreted the higher result as a sign that more consumers than expected snapped up new PCs, meaning the upgrade coupons may have helped stimulate demand.

Microsoft's overall revenue gain was greatly helped by the entertainment and devices division, which includes the Xbox 360 video game console and the blockbuster game "Gears of War." The entertainment division's revenue hit $2.96 billion, a 76 percent jump.

The unit lost $289 million, however, roughly even with last year. And Chief Financial Officer Chris Liddell was cautious about where Xbox 360 goes from here. He expects that by June, the company will have sold 12 million units, down from previous guidance of 13 million to 15 million.