Microsoft shares jump on forecast

SEATTLE Fri Oct 26, 2007 6:43am EDT

Microsoft Chief Executive Officer Steve Ballmer speaks in Santa Clara, May 9, 2007. Microsoft lifted its full-year forecasts and posted 23 percent quarterly profit growth on Thursday, topping analysts' estimates on strong sales of ''Halo 3'' and Vista, and sending its shares up 11 percent. REUTERS/Lou Dematteis/Microsoft Handout

Microsoft Chief Executive Officer Steve Ballmer speaks in Santa Clara, May 9, 2007. Microsoft lifted its full-year forecasts and posted 23 percent quarterly profit growth on Thursday, topping analysts' estimates on strong sales of ''Halo 3'' and Vista, and sending its shares up 11 percent.

Credit: Reuters/Lou Dematteis/Microsoft Handout

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SEATTLE (Reuters) - Microsoft Corp (MSFT.O) lifted its full-year forecasts and posted 23 percent quarterly profit growth on Thursday, topping analysts' estimates on strong sales of "Halo 3" and Vista, and sending its shares up 11 percent.

The world's largest software maker raised full-year revenue targets across its business divisions and gave a bullish profit forecast for the crucial, current holiday quarter.

Investors have waited for sales of the new Windows Vista operating system to pick up since its January release. Windows, which sits on more than 90 percent of all personal computers, generates almost 80 cents in profit for every dollar in sales.

"The growth of Windows Vista has finally occurred," said Kim Caughey, senior analyst at Fort Pitt Capital Group.

"Halo 3," the latest installment of Microsoft's flagship shooter franchise video game, also racked up more than $300 million in its first week of sales in September.

Microsoft beat even Wall Street's most bullish forecast with a net profit of $4.29 billion, or 45 cents per diluted share, in its fiscal first quarter, up from $3.48 billion, or 35 cents per diluted share, a year earlier.

Revenue rose 27 percent to $13.76 billion in the three months ended September 30.

The highest analyst profit forecast had been 40 cents per share, with revenue on average seen at $12.54 billion, according to Reuters Estimates.

"It looks like they're firing on all cylinders," said Toan Tran, analyst at Morningstar. "Windows, Office ... all grew by 20 percent and they're the big hitters for Microsoft."

Microsoft shares, already up 10 percent in the last month, surged to $35.40 in after-hours trade, up 10.7 percent from the close and their highest since 2001. Its market capitalization grew by more than $30 billion and its top shareholder, co-founder Bill Gates, saw his fortune grow by $3 billion.

Microsoft raised its full-year revenue outlook for its Windows client sales to a range of 12 percent to 13 percent versus a previous forecast of 9 percent to 10 percent.

Market research firms Gartner and IDC had said global PC shipments rose about 15 percent in the September quarter.

Revenue at the Windows client division, focused on PCs, rose nearly 25 percent in the quarter. Operating profit at the segment went up 27 percent to $3.37 billion.

Consumers also bought Xbox 360 consoles to play "Halo 3," vaulting Microsoft's game machine past rivals in September.

The entertainment and devices division, after six straight annual losses, delivered 91 percent revenue growth and swung to a $165 million profit from a $142 million loss a year earlier.

LOOKING AHEAD

Microsoft raised full-year earnings estimates to a range of $1.78 to $1.81 per share from a previous range of $1.69 to $1.73. It also raised its full-year revenue estimate range by almost $2 billion, to $58.8 billion to $59.7 billion.

Wall Street analysts, on average, were forecasting fiscal 2008 earnings of $1.73 per share on revenue of $57.3 billion.

"Microsoft is never going to be aggressive on guidance. Even from a conservative perspective, it looks to be a pretty positive forward view," said Eric Schoenstein, co-portfolio manager at Jensen Portfolio.

Those figures also include a $85 million impact, or 1 cent per diluted share, from costs and expenses related to its $6 billion acquisition of digital advertising firm aQuantive.

For the current quarter, Microsoft forecast earnings of 44 cents to 46 cents per diluted share on revenue of $15.6 billion to $16.1 billion. Analysts, on average, had expected earnings per share of 44 cents a share on revenue of $15.5 billion in the fiscal second quarter, according to Reuters Estimates.

Microsoft forecast second-quarter operating profit margin would fall to about 38 percent from 43 percent in the September quarter, due in part to sales of Xbox 360 consoles, which it sells at a loss in order to drive sales of high-margin games.

The current holiday quarter is a crucial one for Microsoft as it aims to spur adoption of new computers running Vista. Its entertainment arm also banks on the December quarter generating twice as much revenue as any other quarter of the year.

The company's online services group lost money for a fifth-straight quarter despite a 25 percent rise in revenue from a year earlier, helped by an $80 million revenue boost from aQuantive, which became part of Microsoft in August.

Microsoft's Office business posted a 20 percent increase in revenue to $4.11 billion and profit rose 21 percent.

Prior to its earnings, Microsoft shares traded at 18 times analysts' estimated fiscal 2008 earnings, compared with a 17 ratio for rival software maker Oracle Corp ORCL.O. Web rival Google Inc (GOOG.O) trades at 32 times 2008 profit estimates, while International Business Machines Corp (IBM.N) was at 14.

(Additional reporting by Ritsuko Ando in New York and Lisa Baertlein in Los Angeles, editing by Braden Reddall)

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