Thursday, January 24, 2008

Microsoft Profit Tops Estimates on Xbox; Shares Rise (Update3)

By Dina Bass

Jan. 24 (Bloomberg) -- Microsoft Corp., the world's largest software maker, posted a second-quarter profit that surpassed analysts' estimates and raised forecasts for the year after selling more Xbox 360 games and Windows programs.

The stock climbed 4.5 percent after Microsoft said net income rose 79 percent to $4.71 billion, or 50 cents a share. That beat the 46-cent average of estimates compiled by Bloomberg. Sales climbed 30 percent to $16.4 billion, exceeding projections.

Better-than-forecast PC sales and a second straight profit in the Xbox unit helped Microsoft top predictions for the second quarter in a row. Chief Executive Officer Steve Ballmer increased the annual sales forecast to as much as $60.5 billion, signaling Microsoft can withstand a slowdown in the U.S. economy.

``They're giving a fairly positive outlook for the remainder of their fiscal year, which really had been a concern,'' Pacific Crest Securities Inc.'s Brendan Barnicle said in an interview. The Portland, Oregon-based analyst expects the shares to outperform their peers.

Microsoft, based in Redmond, Washington, rose $1.49 to $34.74 in late trading after closing at $33.25 on the Nasdaq Stock Market. The shares advanced 19 percent last year.

Net income in the three months ended Dec. 31 was $2.63 billion, or 26 cents, a year ago, the company said in a statement today. Microsoft deferred $1.64 billion in sales in that period, cutting revenue and profit.

Windows and Office benefited from PC demand, growing interest in pricier new versions and inroads against software piracy. Holiday purchases of exclusive Xbox 360 video-games such as ``Halo 3,'' the top-selling game in the U.S. last year, fueled revenue growth and led to more console sales.


Microsoft said profit in the year ending June 30 will be $1.85 to $1.88 a share, on sales of $59.9 billion to $60.5 billion, above analysts' average estimate profit of $1.81 and sales of $59.4 billion and an increase from Microsoft's previous forecast.

``There's a lot of concern, and we're not blind to that,'' Chief Financial Officer Chris Liddell said today in an interview. ``But the momentum we have in the second half is extremely good, so we feel optimistic enough to raise our forecast.''

Microsoft's business isn't showing signs of slowing related to the U.S. economy, Liddell said, pointing to PC shipment growth and an unexpected increase in Microsoft's unearned revenue, a marker of future sales. Unearned revenue, which tracks signings of multiyear corporate contracts for Microsoft software, rose $500 million more than Liddell had forecast.

For the current quarter, profit will be 43 cents to 45 cents on sales of $14.3 billion to $14.6 billion, in line with the average analyst estimate for profit of 44 cents and sales of $14.4 billion.

`Remarkable' Growth

``It's remarkable that they're growing as fast as they are for a company so large,'' said Ken Allen, a portfolio manager at T. Rowe Price Associates Inc. in Baltimore. His firm is the 5th- biggest institutional holder of Microsoft shares.

Revenue in the unit that includes Xbox rose 3.1 percent to $3.06 billion, exceeding Microsoft's forecast that it would decline as much as 8 percent. The division posted earnings of $357 million, the first time it has reported profits in back-to- back quarters.

Liddell cited the high number of games sold per Xbox machine for the unit's revenue and profit increases. Consumers on average buy seven titles with each machine, which bolsters earnings because the games are profitable while the consoles usually lose money or break even.

Game Plan

Ballmer has lined up exclusive titles such as ``Halo 3'' and ``Mass Effect,'' named Game of the Year by the New York Times, to win users from Nintendo Co.'s Wii system and achieve the first annual profit in the Xbox unit.

``The games division is doing really well,'' said Avi Cohen, head of research at Boston research firm Avian Securities LLC. ``They are competing well against the Wii and `Halo' is certainly helping.''

Sales in Microsoft's business division, which includes the Office applications and Exchange and SharePoint server software for corporate customers, advanced 37 percent to $4.81 billion. That topped the $4.61 billion estimate of UBS AG analyst Heather Bellini in New York.

The client division, home to Microsoft's Windows software for PCs, posted a 68 percent increase in sales to $4.34 billion. The company gained by persuading PC makers to install pricier versions of its Vista operating system on machines. About 75 percent of the Windows programs sold last quarter were the higher-priced versions, Liddell said.

PC shipments rose 15.5 percent in the quarter, according to Framingham, Massachusetts-based researcher IDC. Microsoft had projected an increase of as much as 13 percent.

Twenty-three analysts suggest buying Microsoft shares, seven recommend holding them and two have ``sell'' ratings, according to data compiled by Bloomberg.

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