Microsoft shares up on earnings and bullish outlook - MarketWatch
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SAN FRANCISCO (MarketWatch) -- Microsoft Corp. shares jumped more than 3% on Friday, a day after the company posted a 65% surge in fiscal third-quarter profit thanks to sales of new products such as the Vista operating system.
The world's largest software maker also pleased analysts and investors with a particularly bullish outlook for its fiscal 2008 period, which begins in July.
Two analysts upgraded the Redmond, Wash., company (MSFT (Related)
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following the report, which was released after the close of trading Thursday.
Brent Thill of Citigroup lifted his rating to buy from hold, saying that the main overhangs on the stock -- the adoption of Vista, the potential for a slowdown in business spending and the company's fiscal 2008 forecast -- have been removed.
Brad Reback at CIBC World Markets had been bearish on the shares with an underperform rating. In a note to clients headlined "We were wrong," he raised his rating to sector perform.
"Microsoft's core business units are performing solidly, with multiple products in early stages of product cycles with more set for release on the horizon," Reback wrote.
Shares of Microsoft rose $1 to close at $30.12. The stock has regained much of the ground lost since it peaked at $31.48 in January.
Earnings surge on Vista sales
Microsoft reported earnings of $4.93 billion, or 50 cents a share, compared with $2.98 billion, or 29 cents, in the year-earlier period. Revenue rose 32% to $14.4 billion.
Analysts surveyed by Thomson Financial had expected Microsoft to post earnings of 46 cents a share on revenue of $13.89 billion.
Microsoft had been widely expected to post solid growth for the quarter, when it saw significant new product releases including Vista and Office 2007, both of which were released to consumers Jan. 30. But analysts and investors had been eagerly anticipating further details on just how well Vista, Microsoft's first new operating system since 2001, is performing.
When Chief Executive Steve Ballmer said in February that some analysts' expectations for Vista were too high, it caused anxiety. But "Vista was the big surprise" in Microsoft's earnings news Thursday, Pacific Crest Securities analyst Brendan Barnicle said. "There was a lot of concern about lower guidance because of the comments Ballmer made in February, but clearly those were overstated," Barnicle said.
In a conference call with analysts, Microsoft Chief Financial Officer Chris Liddell said sales and profit for the quarter "exceeded our expectations," adding that both Vista and Office 2007 "are off to very good starts."
Microsoft was helped by an additional $1.67 billion in revenue and operating profit that had been deferred from the previous quarter, because it resulted from promotional programs for Vista and Office during the holiday season.
But Liddell said that even without the deferred revenue, sales overall still grew 17% from the year-earlier period.
Microsoft's Client division, which includes Vista, reported $5.27 billion in sales for the quarter, compared with $3.15 billion in the period a year earlier. Liddell declined to offer a specific update on Vista license sales. Microsoft has said it sold 20 million Vista licenses in its first month of availability.
"Client revenue was surprising," said McAdams Wright Ragen analyst Sid Parakh. "They came in pretty nice actually, which might indicate Vista is doing OK," Parakh said.
Many Microsoft watchers have also been eagerly anticipating guidance from the company for fiscal 2008.
Microsoft said Thursday it expects 2008 revenue of $56.5 billion to $57.5 billion, topping the consensus analyst estimate of $56.2 billion. The company said it expects earnings of $1.68 a share to $1.72 a share for the year, at the high end of consensus estimates.
"The key was guidance," Parakh said, "It was pretty good, and Microsoft is usually conservative."
Barnicle said, however, that Microsoft's fourth-quarter estimate was disappointing. The company said it expects fourth-quarter earnings of 37 cents to 39 cents a share on revenue of $13.1 billion to $13.4 billion.
Office pulls its weight, too
Microsoft (MSFT (Related)
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said its business division, which includes Office 2007, reported revenue of $4.83 billion for the third quarter, compared with $3.6 billion in the period a year earlier.
Microsoft's director of investor relations, Charly Tracy, said that sales of Office 2007 beat Microsoft's own quarterly estimate by $200 million, and were "driven by retail strength," or the strength of over-the-counter sales to consumers.
Online services, one of Microsoft's smallest but potentially most important divisions, generated sales of $623 million during the quarter, compared with $562 million in the year-earlier period. Microsoft has said it intends to invest generously in its online services, including search and advertising, to gain ground on market leaders including Google Inc. (GOOG (Related)
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Liddell said Microsoft saw 23% growth during the third quarter in online ad sales, and is expecting a growth rate higher than 20% in the fourth quarter as well. Liddell said the growth to date in ad sales has exceeded Microsoft's expectations.
Microsoft's Entertainment and Devices division, which includes its Xbox videogame system, reported revenue of $929 million, down from $1.18 billion a year earlier. Liddell said Microsoft sold 500,000 Xbox units during the quarter, and he reiterated the expectation that the Entertainment and Devices unit, which also includes the Zune portable media player, will become profitable in fiscal 2008.
Liddell said Microsoft is not yet projecting results for particular business units for 2008.
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Industry: Computer Software Industry: Technology, Software Industry: Software Topic: Analyst Topic: Company Announcements Topic: Earnings Topic: Stock Reports Topic: Market News Company: Microsoft Corporation (MSFT) Company: Google Inc (GOOG)
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