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Microsoft's Income Rises 35%, Driven by Sales of Windows 7

Source :nytimes          update : 2010-04-23

Sometimes breaking a sales record isn't good enough. Just ask Microsoft.

In the span of a couple of weeks, analysts and investors following the technology industry have had their expectations swell for a powerful recovery. Sales at giants like Intel, Apple and EMC have surged past prerecession levels to hit new highs. Both consumers and corporations have increased their technology spending, and there is talk once again of hiring in Silicon Valley.

Microsoft, the world’s largest software maker, added to the good cheer on Thursday, as it too reported record results for its third quarter, with sales rising 6 percent to $14.50 billion. But Microsoft’s numbers left investors wanting more.

Shares of Microsoft promptly fell about 4.5 percent to $29.98 in after-hours trading on Thursday, after the release of third-quarter figures.

“They had strong results, but the expectations from investors were higher,” said Sasa Zorovic, an analyst with Janney Capital Markets. “This was a sign that we probably need to be a little more realistic, and that things are moving slower than you would believe by the recent euphoria.”

The hopes for a blowout quarter from Microsoft rose in recent weeks as other technology companies reported their results, and as data about the PC industry was made public.

Intel, for example, just reported record sales of its PC chips, noting particularly strong demand for faster, more expensive laptop chips. In addition, a number of analysts raised their predictions for 2010 sales of PCs, in some cases predicting as much as 25 percent growth for the industry.

Microsoft’s third-quarter figures backed up this optimism around the PC market.

Its net income rose 35 percent, to $4.01 billion or 45 cents a share, from $2.98 billion, or 33 cents, in the period a year ago. Analysts polled by Thomson Reuters expected Microsoft to earn 42 cents a share.

Executives at Microsoft pointed to Windows as the main driver of revenue during the quarter, as sales of the software rose to $4.42 billion, from $3.45 billion in the same period last year.

According to Microsoft’s estimates, the PC market grew 25 percent during the last quarter, with the consumer segment rising 30 percent and business market rising 14 percent. The strength of the sales to businesses was a real highlight for Microsoft, because many companies have resisted buying new PCs.

“We are encouraged by the recent uptick in business PC growth and expect this business PC refresh cycle will continue over a couple of years,” said Peter Klein, chief financial officer at Microsoft, during a call with Wall Street analysts.

Brendan Barnicle, a software analyst with Pacific Crest Securities, said in an interview, “The most important thing is that they’re seeing business PCs come back,” adding, “This is huge.”

Mr. Barnicle noted that rising corporate spending on PCs should drive Windows 7 sales as well as sales of Office 10, which will go on sale in June.

Microsoft also said its search, gaming and online software products performed well during the quarter.

Microsoft has tried to put the dark days of the recession and a string of product missteps behind it. The company spent much of the last 18 months retooling its core products. It now looks to rebuild its relationship with consumers over the next year via various pieces of software and gadgets.

For instance, Microsoft has worked to revitalize its smartphone software business, demonstrating a new smartphone operating system, Windows Phone 7, that will ship on cellphones late this year. In addition, the company just released a pair of new phones aimed at handling social networking tasks like posting photos and videos online in a bid to court a younger audience.

Other than the PC, Microsoft has some razzle-dazzle in store for video gamers. Later this year, it will begin selling a version of its gaming accessory code-named Project Natal. This product will allow people to do away with controllers altogether and instead play games using body gestures.

Katherine Egbert, an analyst with Jefferies & Company, has forecast that Microsoft could generate up to $1.3 billion in sales of the Project Natal systems over the first year of the product’s release if it is priced at about $100.

But even if the Project Natal device is a blockbuster, it will do little to impact Microsoft’s overall revenue, which remains highly dependent on the Windows and Office franchises.

“Microsoft's entertainment division is important, but it just doesn’t really move the dial,” Ms. Egbert said.