July 20, 2007 / 12:01 AM / 12 years ago

Microsoft profit up on Office, swallows Xbox charge

SEATTLE (Reuters) - Microsoft Corp (MSFT.O) posted a 7 percent gain in net profit as demand for its Office software and improved results from its online arm more than compensated for a $1.1 billion charge to repair Xbox video game consoles.

Guests play the Xbox 360 "Halo 3" Multiplayer Beta during a preview party at Quixote Studios in Los Angeles May 15, 2007. Microsoft Corp. eked out a gain in quarterly net profit despite a $1 billion charge to pay for repairs to its Xbox 360 game consoles, and the company slightly raised full-year earnings and revenue forecasts. REUTERS/Mario Anzuoni

Microsoft also slightly raised full-year earnings and revenue forecasts citing demand for new software products like its Windows Server 2008.

The company said on Thursday net profit was $3.04 billion, or 31 cents per diluted share, in its fiscal fourth quarter, up from $2.83 billion, or 28 cents per diluted share, a year earlier. Sales rose 13 percent to $13.4 billion.

The earnings met analysts’ expectations while sales were slightly better than the target of $13.27 billion, according to Reuters Estimates.

“They beat by a little bit and raised by a little bit,” said Jane Snorek, technology analyst at First American Funds. “There were some expectations that with this PC boom we would see some big upside, but I guess not.”

But strong personal computer sales did not pay off as much as some analysts had hoped, and shares dipped about 2 percent in extended trade to $30.88 after closing at $31.51 on Nasdaq. It had run up nearly 6 percent since Monday on expectations of good results.

Microsoft said it estimated the personal computer market to have grown between 11 percent and 13 percent in the past three months. The company forecast PC market growth of 9 percent to 11 percent this year with Windows sales expected to move in line.

“Many of the same factors that helped us be successful in 2007, such as a healthy PC hardware market, customer acceptance of our new versions of Office and Windows ... will help propel us in 2008,” Microsoft Chief Financial Officer Chris Liddell said on a conference call with analysts.

For the current quarter, Microsoft sees diluted earnings per share of between 38 cents and 40 cents, based on a revenue range of $12.4 billion to $12.6 billion. The average estimates of Wall Street analysts are for earnings per share of 38 cents on sales of $12.5 billion, according to Reuters Estimates.

The company lifted both ends of its fiscal 2008 earnings-per-share forecast range by a penny, to $1.69 to $1.73. The fiscal 2008 revenue range was raised $300 million to a range of $56.8 billion to $57.8 billion.


The world’s largest software maker had warned earlier this month that it would incur a charge of up to $1.15 billion in the quarter ended in June to fix an “unacceptable” number of Xbox 360 repairs and offer a new extended warranty to customers.

Microsoft said it still aims for its entertainment and devices division to turn profitable in fiscal 2008, with a boost expected from the September release of “Halo 3,” the latest installment of one of the best-selling game franchises.

The company said the Microsoft Business division, home to its Office business, posted a 19 percent rise in revenue to $4.63 billion, exceeding its sales expectations by $200 million on the back of Office 2007 demand.

Its online services group notched a third-straight quarter of revenue growth with an increase of 19 percent from a year earlier, boosted by a 33 percent rise in Web advertising.

The segment’s improved sales still did not lead the division to profit. Microsoft’s 19 percent sales growth at its online unit also pales in comparison to Google Inc.’s (GOOG.O) 58 percent revenue growth in the prior quarter.

Microsoft’s server and tools business expects revenue to grow 14 percent to 15 percent this year, boosted by several new products being introduced, including Windows Server 2008 and SQL Server 2008 database software.

Microsoft stock has risen 6 percent in the year to date, compared with a 10 percent gain in the S&P 500 during the period.

Reporting by Daisuke Wakabayashi; Additional reporting by Gina Keating in Los Angeles

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