Microsoft's Vista Sales Boost 3Q Profit

The Associated Press
Friday, April 27, 2007; 4:48 PM

SEATTLE -- Shares of Microsoft Corp. soared nearly 4 percent Friday, after the company posted a 65 percent jump in third-quarter profit, boosted by sales of its new Windows Vista operating system and Office 2007, and by upgrade coupons issued over the holidays.

The results eased fears that Vista is too pricey, requires too many hardware upgrades and doesn't work with other companies' applications.

Microsoft said Thursday it earned $4.93 billion, or 50 cents per share, for the quarter ended March 31, from $2.98 billion, or 29 cents per share, in same period last year.

Excluding one-time items, profit totaled 49 cents per share, ahead of Wall Street's view for 46 cents per share, according to Thomson Financial.

Shares rose $1.02, or 3.5 percent, to close at $30.12 on the Nasdaq Stock Market. The results were released after the market closed Thursday.

Revenue for the fiscal third quarter rose 32 percent to $14.4 billion. Analysts were looking for $13.89 billion in sales.

Microsoft started selling its newest operating system, Windows Vista, to consumers at the end of January. Sarah Friar, an analyst at Goldman Sachs, said Microsoft watchers were worried adoption would be slow.

"Every time I open the paper, there's some article about how bad Vista is," she said. Plus, analysts feared the cost of successfully running Vista was too high for consumers.

"Not only am I having to buy a new operating system, I'm having to buy a new PC," she said.

News that Apple Inc.'s popular iTunes digital music software didn't work with Vista, and that Dell Inc. customers were clamoring for more PCs with the old operating system, XP, helped fuel concerns, analysts said.

Microsoft quelled some of those fears when it reported its "client" division, responsible for Windows, brought in $5.27 billion in sales, a 67 percent improvement from a year ago.

Client division sales were "surprisingly ahead of where we thought they would come in," said Sid Parakh, an analyst at McAdams Wright Ragen.

Business division revenue, which includes sales of Office 2007, rose 34 percent to $4.83 billion.

Microsoft Chief Financial Officer Chris Liddell said the "excellent quarter" was due to better-than-expected sales of Vista and Office. Liddell said Vista beat internal forecasts by $300 million to $400 million, and Office 2007 sales were $200 million better than expected.

Microsoft's entertainment and devices division, which includes the Xbox 360 game console and the Zune music player, posted a 21 percent sales drop to $929 million in an expected post-holiday slump.

Liddell said the company is still on track to sell 1 million Zunes by the end of June and reach the 12 million mark in Xbox 360 units sold since the product hit store shelves in November 2005.

Microsoft trails Google Inc. and Yahoo Inc. in making money from Web searches, but online services revenue edged up 11 percent to $623 million in the quarter. Online advertising revenue grew 23 percent year-over-year, and Liddell said in a conference call with analysts that "revenue per search" is higher than a year ago, when the company was still using a third-party ad platform.

Microsoft also said it repurchased more than $6.7 billion in stock during the quarter.

For the fiscal fourth quarter, which ends June 30, Microsoft said it expects to earn 37 cents to 39 cents per share, with revenue of $13.1 billion to $13.4 billion. Wall Street currently expects a profit of 40 cents per share on $13.31 billion in sales.

© 2007 The Associated Press