Microsoft Profit Tops Forecasts with Help from Vista License Upgrades

Microsoft posted a forecast-beating 65% rise in quarterly profit on Thursday, boosted by revenue booked on discounted license upgrades for its new Windows Vista operating system and Office 2007 software.

Microsoft's Windows Vista operating software.
Seth Wenig
Microsoft's Windows Vista operating software.

Microsoft posted a net profit of $4.93 billion, or 49 cents a diluted share, versus a profit of $2.98 billion, or 29 cents a share, in the year-ago period. Revenue rose 32% to $14.4 billion.

Shares of Microsoft jumped about 3.5% in extended trade after the company announced results. In regular Nasdaq trade, the stock had closed up 11 cents at $29.10.

Analysts, on average, had forecast the world's largest software maker to earn 46 cents a share on revenue of $13.89 billion, according to Thomson Financial.

Microsoft deferred about $1.7 billion in revenue from its second quarter to its third quarter to account for upgrade coupons given to customers prior to the January launch of Vista and Office 2007.

The company's 2008 business year, which starts in July, will be the first full year of earnings to benefit from consumers buying new PCs loaded with Vista and Office 2007 or companies upgrading computer systems.

"The strength of Vista is really driving this and it matches up with our model. We anticipate Vista really begins to roll out in enterprise by the end of the calendar 2007," said Fort Pitt Capital Group Analyst Kim Caughey. "We'll see meaningful uptake by businesses and Microsoft should see revenues accelerate accordingly."

Microsoft forecast diluted earnings a share of between $1.68 and $1.72 on revenue of $56.5 billion to $57.5 billion for the coming business year.

Analysts had forecast earnings of $1.69 a share on sales of $56.34 billion, with estimates ranging from $55.3 billion to $59.6 billion, according to Reuters Estimates.

"The revenue for 2008 looks really nice. It's at 14% growth. No one is at that (rate). People are at about 11% growth," said Analyst Jane Snorek of First American Funds. "I would've thought Microsoft would get a little more upside on EPS. Its EPS at $1.68 to $1.72 brackets consensus. If revenue can grow at up to 14%, then they should say they can do $1.75. It could be MSN or Xbox."

Microsoft expects Vista and Office 2007, the latest versions of its two flagship products, to underpin earnings growth over the next few years. After several delays, Microsoft released both to consumers in January.