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Originally published April 27, 2007 at 12:00 AM | Page modified April 27, 2007 at 2:02 AM

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Vista sales deliver double-digit growth for Microsoft

Despite the recent static about Windows Vista's performance and prospects from reviewers, competitors and even Microsoft itself, the company...

Seattle Times technology reporter

Despite the recent static about Windows Vista's performance and prospects from reviewers, competitors and even Microsoft itself, the company rode the success of its new operating system to third-quarter sales and profit that exceeded expectations.

Microsoft also set a course Thursday for continued double-digit growth in the upcoming fiscal year, in line with what financial analysts were predicting.

"It's good to see these numbers," said Sid Parakh, an analyst with McAdams Wright Ragen in Seattle. "It goes against what we've been hearing for a while about Vista."

In the three months ended March 31, Microsoft brought in $14.4 billion in revenue, up 32.1 percent from a year ago. Net income was up 65.5 percent to $4.9 billion, or 50 cents a share, besting the analyst consensus of 46 cents as compiled by Thomson Financial.

Even after adjusting for one-time changes — recognition of $1.7 billion in revenue from a program meant to spur PC demand ahead of Vista's launch, a tax credit and a legal charge — the company had double-digit growth across the board.

"Our results were primarily driven by strength in our core products," Chief Financial Officer Chris Liddell said in a conference call. Windows Vista and Office 2007, both of which went on sale during the quarter, "will have multiyear impact and both are off to very good starts."

That impact will be felt in fiscal 2008, beginning July 1, along with another wave of releases from across Microsoft's business lines, Liddell said.

He forecast revenue in fiscal 2008 of $56.5 billion to $57.5 billion, an 11 to 12 percent growth rate. To put that in perspective, Liddell said "this translates into an increase of over $5.5 billion, an amount larger than the total annual revenue of some Fortune 500 companies."

Operating income for the coming year was pegged at $22 billion to $22.5 billion, growth of 12 to 14 percent. Earnings per share will be between $1.68 and $1.72, compared with the financial analyst consensus estimate, according to Thomson, of $1.69. That guidance assumes Vista will come on strong and represent 85 percent of Windows sales in fiscal 2008, Liddell said.

Liddell's statements helped clarify the status of Vista after a string of mixed messages during the past three months. On Feb. 15, Chief Executive Steve Ballmer said some analyst forecasts for Vista sales were "too aggressive."

Then the company announced that it sold more than 20 million licenses for Vista during its first month on the market, "more than double" the pace of sales after the introduction of predecessor Windows XP in 2001. Some analysts questioned the figures and the comparison.

More recently, Dell, the world's second largest PC maker, announced plans to again offer the older Windows XP on new consumer PCs, in response to demand from its customers.

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And on Wednesday, Apple said it sold a record 1.52 million Macs in the quarter that Vista debuted. Apple executives boasted that Macs were "clearly gaining market share" as sales for the quarter grew three times faster than the over all worldwide computer market, up 10.9 percent, according to research firm IDC.

Charles Di Bona, an analyst with Bernstein & Co., said Microsoft did a better job Thursday of describing how it views the potential growth of Windows sales in the coming year. It's the same message the company tried to deliver in February, he said.

Microsoft is telling analysts to look at PC unit-sales growth in the developing world differently because piracy rates there are higher and fewer people can buy premium products, compared with mature markets. "You have to look at that through a different lens because [Microsoft] can't monetize it as well," Di Bona said.

The pace of adoption is not the only factor analysts are tracking to evaluate Vista's impact on the bottom line.

Liddell said more than seven of 10 Windows licenses sold were for the more expensive premium versions of the operating system. He also said consumers are adopting Vista faster than businesses.

The soft spot in Microsoft's earnings report was its Entertainment and Devices Division, which saw revenue drop 21 percent on lower sales of the Xbox 360 video-game console. The company said it was expecting the decline and the division was still on track to turn its first profit in fiscal 2008.

Microsoft sold more than 500,000 consoles during the quarter and has sold more than 11 million since the system's launch in 2005.

Its stiffest competition has proved to be Nintendo's Wii, rather than the PlayStation 3 from Sony. Nintendo has found an audience for the Wii beyond traditional hard-core gamers and said Thursday it sold 5.84 million consoles since November.

Microsoft's online services business segment is the smallest by revenue, but among the most important measures of the company's performance in the emerging world of software services delivered via Internet. It saw revenue grow 11 percent to $620 million in the quarter. Advertising revenue, where Microsoft competes directly with Google and Yahoo!, grew 23 percent.

Di Bona, who has watched this segment like a hawk, said it appeared Microsoft has "stabilized the patient," referring to the ad-revenue growth and other barometers of Microsoft's online performance.

"How do you want to get him up off the table and move in the right direction?" he asked Liddell during the conference call.

Liddell reiterated what Microsoft executives have said repeatedly: "We are going to continue to invest in this business because we see it as a long-term one."

Microsoft's earnings report, delivered after the close of regular trading, pushed shares up 4.1 percent in the extended market to finish at $30.30. Shares were up 11 cents during regular trading to $29.10.

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

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