Microsoft Earnings Boosted By Windows Vista, Office, Halo - InformationWeek

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Software // Enterprise Applications

Microsoft Earnings Boosted By Windows Vista, Office, Halo

The combined revenue of Microsoft's client, business, and server and tools divisions grew by more than 20%, the company said.

Microsoft on Thursday reported a 23% jump in profits, and a 27% boost in revenue in the company's first fiscal quarter, due in part to "robust demand" for Windows Vista and Office 2007, and a near doubling of revenue in its video game division.

The revenue growth was the fastest of any first quarter since 1999, Chris Liddell, chief financial officer of Microsoft, said in a statement. Revenue topped $13.76 billion for the quarter ended Sept. 30, compared with $10.81 billion the same period a year ago. Profits rose to $4.29 billion from $3.48 billion a year ago.

Wall Street analysts on average had expected $12.57 billion in revenue and 39 cents per share, according to Thomson Financial. In after hours trading Thursday, Microsoft shares were up over 11% to more than $35.

The company reported "robust demand" for Windows Vista, Office 2007, Windows Server, and SQL server. The combined revenue of Microsoft's client, business, and server and tools divisions grew by more than 20%. Revenue in the company's video game division soared by 91%, driven primarily by the success of the launch of Halo 3.

Microsoft said Vista sales have been increasing since the release of the Windows operating system to consumers in January. "Customer demand for Windows Vista this quarter continued to build with double-digit growth in multi-year agreements by businesses and with the vast majority of consumers purchasing premium editions," Kevin Johnson, president of the Platform and Services Division at Microsoft, said.

A strong global PC market helped sales of Windows Vista and Office 2007 considerably. PC shipments worldwide grew by 15.5% in the third quarter, according to IDC. Much of the growth occurred outside the United States, where PC shipments increased by only 4.7%.

Indeed, during a teleconference with analysts, Chris Liddell, chief financial officer for Microsoft, said sales growth was strongest in the international markets, such as Brazil, China and Russia. Nevertheless, the fact that Windows sales grew faster than the PC market was an indication that customers were upgrading their PCs to Vista, and also buying the premium edition. Three quarters of Microsoft's customers bought the more expensive version, Liddell said.

"Clearly, we're very happy with the client division overall," Liddell said of the unit that includes Windows and Office. While consumers outpaced business in [Windows] Vista sales, the fact that the company saw a 27% increase in volume licensing in the quarter was a good indication that business sales would do well over time. "It's still early days, but we're very happy with the progress," Liddell said.

Revenue from the company's Entertainment and Device Division, which includes the Xbox 360 videogame console and the Zune media player, soared more than 90% to $1.93 billion. The Halo 3 videogame, which has broken several industry records for market performance since its release Sept. 25, contributed $330 million in revenue. The company also sold 1.8 million Xbox 360 consoles.

Microsoft's Internet business lagged behind the other divisions. While revenues increased to $671 million from $536 million a year ago, operating losses increased to $264 million from $102 million.

While Microsoft expects to eventually turn the business around, the company is more focused this year on growing the business than in turning a profit. "It's not going to be our primary determinant this year," Liddell said of profits.

Microsoft has made some big moves toward a turnaround driven by online advertising. One was the $6 billion acquisition during the quarter of digital advertising company aQuantive, which is expected to give the company a boost in its competition with Google for search advertising.

In addition, Microsoft on Wednesday announced a $240 million investment in Facebook, one of the fastest growing social networks on the Web with 50 million active users. Microsoft also signed a deal to sell advertising on Facebook's international sites, expanding a year-old contract that had covered only Facebook's U.S. site.

For the second fiscal quarter, Microsoft said it is expecting revenue in the range of $15.6 billion to $16.1 billion, operating income from $5.9 billion to $6.1 billion. For full fiscal year, Microsoft forecast its revenue will reach between $58.8 billion and $59.7 billion, with operating income in the range of $23.3 billion and $23.7 billion.

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