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Originally published Friday, October 27, 2006 at 12:00 AM

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Microsoft posts robust numbers

Microsoft posted dazzling numbers for the past quarter Thursday, besting analyst expectations and its own guidance for the three big barometers...

Seattle Times technology reporter

Microsoft posted dazzling numbers for the past quarter Thursday, besting analyst expectations and its own guidance for the three big barometers: revenue, profit and earnings per share.

But the big show is still to come, with the wave of major products set to launch beginning next month.

With profit of $3.48 billion on sales revenue of $10.81 billion — both up 11 percent from a year ago — it was a "blissfully boring" start to Microsoft's 2007 fiscal year, said Charlie Di Bona, senior equity analyst at Sanford C. Bernstein.

Microsoft turned in earnings per share of 35 cents, handily beating the Wall Street consensus of 31 cents. Some of that profit, however, is the result of shifting costs for marketing major products, including the Windows Vista operating system and Office 2007 software, to the current quarter.

Investors bid the stock up 7 cents to $28.42 in extended trading after Microsoft announced its earnings after the close of regular trading.

Microsoft's server and tools group led the charge, increasing sales 17 percent to $2.5 billion and further establishing itself as a major pillar of the company's business.

It was the 17th consecutive quarter of double-digit growth for the group, which competes with companies such as Oracle and IBM to provide software for servers that run business systems and Internet sites.

"A lot of it has to do with the new products they've launched, SQL Server particularly," said Sid Parakh, analyst with McAdams Wright Ragen. SQL Server 2005 launched in November 2005.

Sales of the product, which handles data management and analysis, grew more than 30 percent in the quarter.

The company's Entertainment and Devices Division, which has sold 6 million Xbox 360 consoles since the video-game system debuted nearly a year ago, saw revenue jump 70 percent to $1.03 billion. The division still lost $96 million on the quarter — substantially less than many analysts expected.

Microsoft is expecting to sell 4 million more consoles during the holiday season. It's also seeing the cost to manufacture the devices come down, accompanied by high sales of games and accessories.

"Price-wise, Microsoft should have an edge and a lot of flexibility if they need to get more aggressive" in fending off competition from Sony's PlayStation 3 and the Nintendo Wii, both scheduled to be introduced next month, said Jonathan Geurkink, analyst with Ragen MacKenzie.

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One dim spot was the online-services group, which saw revenue fall 4.4 percent to $539 million for the quarter. The group — which includes search, MSN online content business and a new suite of services called Windows Live — represents Microsoft's primary challenge to Internet leader Google.

"It's disappointing," Geurkink said. He noted that Google's results, reported last week, blew past analyst expectations, with advertising revenue up 70 percent.

Microsoft's search engine, trailing Google and Yahoo, lost market share in two out of three months during its fiscal first quarter, according to figures from Nielsen//NetRatings.

"We're hard at work on search," said Colleen Healy, Microsoft's general manager of investor relations. She also said the company continues to invest in online services and recently launched its own online advertising platform, which is still gathering customers.

Geurkink, who owns shares in Microsoft, said the online business is "clearly a wait-and-see item" for the company.

"They're obviously going to be doing a lot more with Windows Live and these other Ray Ozzie initiatives," he said, referring to the online-services push being led by the company's chief software architect.

Microsoft adjusted its guidance for the full fiscal year, which ends June 30, 2007, increasing it slightly. It now expects revenue between $50 billion and $50.9 billion; operating income of $19.1 billion to $19.5 billion; and earnings of $1.43 to $1.46 per share.

"This company has a long history of guiding conservatively, and I don't think that has changed," said Bob Toomey, senior vice president at E.K. Riley Advisors. "... I think there's opportunity for them to outperform the current guidance for the year."

Microsoft's expectations for the current quarter — the second in the fiscal year — are less rosy.

It said this week it will defer $1.5 billion in revenue to the January-to-March quarter, stemming from a program to offer computer buyers discounted upgrades to Vista and Office 2007, when the products release to consumers in January.

The $1.5 billion includes other accounting changes as well, and will not have an impact on full-year results.

Microsoft is also planning to make "significant investments to support the launches of our flagship products," Chief Financial Officer Chris Liddell said during a conference call with analysts. Microsoft spent about $200 million on marketing associated with Windows XP in 2001.

It's expecting second-quarter revenue between $11.8 billion and $12.4 billion; operating income between $2.9 billion and $3.1 billion; and earnings of 22 cents to 24 cents per share.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

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