Investor's Business Daily, April 26th, 2007
Microsoft easily beat Wall Street's forecast for its fiscal third quarter Thursday, thanks to a strong start for its Windows Vista and Office 2007 products.
The Redmond, Wash., software kingpin earned 49 cents a share excluding one-time items, on sales of $14.4 billion for the quarter ended March 31. That per-share profit rose 53% from the year-earlier quarter, while sales rose 32%.
Analysts polled by Thomson Financial expected profit of 46 cents on sales of $13.89 billion.
It was the company's highest earnings and sales growth in more than two years.
Microsoft shares were up more than 4% in after-hours trading, after it released its latest results.
It turned in a "pretty solid" quarter, said Charlie Di Bona, an analyst with Sanford C. Bernstein. He says Microsoft MSFT is "being typically cautious" in its outlook.
For the quarter ending June 30, Microsoft forecast revenue of $13.1 billion to $13.4 billion and per-share profit of 37 cents to 39 cents. Analysts were expecting $13.3 billion and 40 cents.
In its preliminary guidance for the fiscal year ending June 30, 2008, Microsoft expects earnings per share of $1.68 to $1.72 on sales of $56.5 billion to $57.5 billion.
The guidance for fiscal 2008 calls for double-digit sales and per-share profit growth, thanks to the continuing rollout of Windows Vista and Office 2007 as well as new products, says Charly Tracy, Microsoft's director of investor relations. Those new products include Windows Longhorn Server, Windows Home Server and new customer relationship management products and services, he says.
Windows Vista "is off to a very good start," Microsoft Chief Financial Officer Chris Liddell said in a conference call Thursday. The results "were primarily driven by strength in our core products," including Windows and Office, he said.
Microsoft's results for the quarter benefited from the deferral of sales and earnings from the second quarter related to technology guarantee programs for Windows Vista and Office 2007. Customers who bought PCs before the new Windows and Office came out in January were given upgrade coupons.
So the latest results included $1.67 billion of revenue and 12 cents of earnings per share that were deferred from the second quarter.
Without those deferrals, Microsoft would have posted a 17% increase in revenue and 19% rise in earnings per share.
Factoring out the deferred revenue, Microsoft's Windows client unit would have seen sales jump 27% and its Office business would have seen sales rise 20%.
Microsoft's third core business, servers and tools, saw sales up 15%.
More customers are buying feature-rich versions of Windows, which helps Microsoft, says Matt Rosoff, an analyst at independent research firm Directions on Microsoft.
With Windows XP, 52% of the licenses sold were for higher-priced versions like Windows XP Premium and Media Center. But with the new Windows Vista, Microsoft is expecting higher-priced versions to make up 60% of sales, he says.
"Windows Vista Home Basic is probably not going to be a very popular (version)," Rosoff said. "Consumers are going to buy more higher-priced editions" like Windows Vista Home Premium and Vista Ultimate.
Since much of the new PC sales are coming from emerging economies, Microsoft has been working to increase sales of its products and reduce piracy rates overseas.
It has been especially active in China, says Allan Krans, an analyst with Technology Business Research. Microsoft has announced cheaper, entry-level versions of its products and forged a pact with Chinese PC maker Lenovo to build an R&D center there.
