Microsoft Shares Rise as Profit Boosted by Business Sales ...

Microsoft Corp. (MSFT), the world?s
largest software maker, rose after it reported fiscal third-
quarter profit that topped estimates on better-than-expected
sales of Windows and Office software for businesses.

Net income slipped to $5.11 billion, or 60 cents a share,
from $5.23 billion, or 61 cents, a year earlier, Redmond,
Washington-based Microsoft said yesterday in a statement.
Analysts had predicted an average 57 cents in profit, according
to estimates compiled by Bloomberg. Sales rose 6 percent to
$17.4 billion, beating the $17.2 billion average projection.

Microsoft, whose Windows business had missed analyst
estimates in four of the prior five quarters, surprised
investors with better-than-expected results as corporate demand
for Windows computers made up for tepid interest from consumers
opting for tablet machines. The company plans later this year to
release Windows 8, the newest version of its operating system,
to help it win back consumers and narrow Apple Inc. (AAPL)?s lead in
the tablet market.

?It?s been a while since Windows did better than the
broader PC market,? said Pat Becker Jr., a fund manager at
Becker Capital Management (NLY) in Portland, Oregon, who owns
Microsoft shares. ?Those trends we?ve seen over the past year
that the corporate market has been robust continued into Q1.?

Microsoft shares climbed as much as 3.2 percent to $32 in
extended trading after the report. It gained 24 percent in the
three months through the end of March, the biggest quarterly
increase since mid-2009, as investors grow more confident about
the prospects for Windows 8.

Product Debuts

Microsoft gave its first look at operating-cost projections
for the fiscal year that starts July 1, saying expenses will be
$30.3 billion to $30.9 billion.

That?s a gain of as much as 8 percent, higher than this
year?s increase, as the company plans for costs related to
product debuts in Windows and Office, Microsoft Chief Financial
Officer Peter Klein said in an interview.

In the current year, expenses will be $28.3 billion to
$28.7 billion, lower than a January forecast of $28.5 billion to
$28.9 billion.

Expenses are under renewed scrutiny because Microsoft?s
revenue growth is slowing, said Colin Gillis, an analyst at BGC
Partners LP in New York, who recommends buying Microsoft shares.

Sales in the current fiscal year are predicted by analysts
to rise 6 percent, compared with 12 percent in 2011.

?It?s all about cost discipline because revenue growth
isn?t great,? he said.

Windows Gaining

Unearned revenue, a measure of future sales, was $15.2
billion, above the $14.9 billion average estimate compiled by
Bloomberg. Profit in the year-ago quarter was boosted by a 5-
cent-a-share tax benefit.

Windows division sales rose 4 percent to $4.62 billion,
compared with the $4.2 billion average estimate, according to
data compiled by Bloomberg. That was the fastest growth since
the quarter that ended Sept. 30, 2010, Microsoft said.

?We are seeing year-over-year growth in Windows again, and
it?s actually looking like it?s growing faster than PCs,? said
Brendan Barnicle, an analyst at Pacific Crest Securities LLC in
Portland, Oregon, who has a neutral rating on the shares.

Revenue in the Business division, mostly from Office
software, rose 9.1 percent to $5.81 billion. That shows that
demand for Office 2010 software, which was released in mid-2010,
has persisted longer than would be expected for an almost two-
year-old product, Microsoft?s Klein said. Analysts on average
had projected $5.6 billion.

Business Demand

Office has ?frankly been better than you would normally
expect at this point in the cycle,? he said.

The Windows division was bolstered by purchases of Windows
7 software from enterprise customers. Shipments of corporate
machines rose 8 percent, while consumer demand was flat, Klein
said.

The increase in Windows sales was greater than the overall
increase in PC shipments reported by Gartner Inc. (IT) PC shipments
were better than expected in the first quarter, according to
market-research firm Gartner, rising 1.9 percent, instead of the
1.2 percent drop Gartner had forecast. The PC market is shaking
off the impact of the European debt crisis and a disk-drive
shortage resulting from last year?s flooding in Thailand.

Households that used to purchase cheap netbook computers
are switching to such devices as tablet computers, he said. A
new iPad went on sale last month and sold 3 million units in its
debut weekend.

Windows 8 Cometh

Microsoft probably won?t be able to alter that trend until
Windows 8 ships, Klein said in January.

While the company has declined to say when Windows 8 will
go on sale, people with knowledge of the matter said last month
that Microsoft will finish work on the product this summer and
put it on sale around October.

Another area of consumer weakness showed up in the division
that includes Xbox, where sales declined 16 percent to $1.62
billion, below analysts? average estimate for sales of $2.1
billion. In what Microsoft termed a ?soft? console market, the
company sold only 1.4 million Xbox 360 machines, down 48 percent
from the year-ago quarter.

Microsoft doesn?t plan to market a new version of its
gaming console until 2013 at the earliest, people with knowledge
of the matter said last month. That means Microsoft will need to
squeeze a few more quarters of sales from the device, and that
weaker demand for the current machine is a concern, Barnicle
said.

To contact the reporter on this story:
Dina Bass in Seattle at
dbass2@bloomberg.net

To contact the editor responsible for this story:
Tom Giles at
tgiles5@bloomberg.net

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