Jan. 27 (Bloomberg) -- Microsoft Corp., the world's largest software maker, said second-quarter profit doubled on lower stock- based compensation costs. Sales of Windows for corporate networks and the Xbox video console beat the company's forecasts.

Net income rose to $3.46 billion, or 32 cents a share, from $1.55 billion, or 14 cents, a year earlier, Redmond, Washington- based Microsoft said today in a statement. Sales rose 6.5 percent to $10.8 billion.

Sales and profit beat analysts' estimates as games and server programs made up for waning demand for Office and Windows for personal computers. The Xbox division turned a profit for the first time, spurred by surging sales of its ``Halo 2'' video game. Microsoft boosted forecasts for the year because server computer sales probably will rise faster than previously thought, Chief Financial Officer John Connors said in an interview.

``It seems like every quarter Microsoft sells more software than people think they are going to,'' said Mark Demos, an analyst in Cincinnati at Fifth Third Asset Management, which manages $34 billion, including 7.5 million Microsoft shares.

Chief Executive Officer Steve Ballmer is battling slower growth after pushing back a new Windows version, prompting customers to delay upgrades. Microsoft shares have lagged behind the Standard & Poor's 500 Index in eight of the past 12 quarters amid concerns about slowing revenue growth.

Microsoft rose 47 cents to $26.58 in extended trading after the results. The shares earlier rose 10 cents to $26.11 in Nasdaq Stock Market composite trading.

`Don't Lose'

Microsoft's server division posted an 18 percent rise in sales, compared with a forecast of 9 percent.

``Our server business is kind of like the New England Patriots,'' Connors said. ``They just don't lose.''

Sales of Microsoft's Office word-processing and e-mail program, the company's second-biggest unit, fell 3 percent from a year ago when sales surged after the release of the Office 2003 programs. Windows for PCs, the biggest and most profitable unit, rose 5.3 percent, Microsoft said, compared with 21 percent in the year-ago quarter.

``It looks like a pretty solid quarter,'' said Alan Davis, an analyst at Seattle-based McAdams Wright Ragen, which manages $2 billion, including Microsoft shares. ``It looks like the big driver, as it has been over the past number of quarters, is the server software business.''

Before stock compensation costs of 3 cents, Microsoft earned 35 cents a share in the second quarter, beating the 33-cent estimate of 26 analysts in a Thomson survey. Analysts forecast $10.6 billion in sales.

Forecasts Raised

Revenue this fiscal year will be $39.8 billion to $40 billion, up from an earlier forecast for $38.9 billion to $39.2 billion. Earnings per share will be $1.09 to $1.11, including 15 cents of compensation costs, Microsoft said today. Analysts were looking for profit, excluding the costs of $1.26, on sales of $39.3 billion.

Sales this quarter will be $9.7 billion to $9.8 billion and per-share earnings will be 27 cents or 28 cents, including 3 cents of stock-based compensation costs, Microsoft said. Analysts polled by Thomson Financial were expecting 32 cents, excluding the costs, and sales of $9.66 billion.

Xbox

The unit that makes Microsoft's Xbox games was boosted by the November release of the ``Halo 2'' game. The division, on which Microsoft spent $12 billion between 2000 and 2004, earned $84 million compared with a loss of $397 million a year earlier. The company said three weeks ago it sold 6.3 million copies of the game and Xbox was the most popular console for November and December.

``They had some nice upside on the revenue line with strength in small pockets like ``Halo 2'' said Greg Tuorto, an analyst in New York at Guardian Life Insurance Co., which has $3.5 billion in assets, including 2.7 million Microsoft shares. ``That made up for the fact that the Windows and Office businesses were just okay.''

Microsoft boosted its estimate for Xbox console sales for the year ended June 30 after the unit almost reached the full- year forecast for sales of 20 million machines at the end of December. The company now expects sales of 21 million to 22 million by June, Connors said.

Microsoft's unearned revenue, or revenue booked for multi year contracts that hasn't been recognized on the income statement, rose to $7.97 billion from $7.78 billion. Connors said the unearned balance would rise further to $8.6 billion by June 30.

Piracy

While market research firm IDC says PC shipments rose 14 percent in the quarter, Microsoft's sales of PC Windows rose at little more than a third that pace.

Much of the PC market growth in the last year has come from countries in South America, Eastern Europe and Asia where most customers use pirated versions of Windows on their computers. Global PC shipments rose 14 percent in the quarter, Framingham, Massachusetts-based researcher IDC said.

Venezuela, Argentina and Romania -- the three fastest- growing PC markets in the first nine months of 2004 -- each have piracy rates of more than 70 percent, according to the Business Software Alliance trade group in Washington. China, the second- biggest PC market after the U.S., has the world's highest piracy rate at 92 percent.

Ballmer, 48, is fighting knockoffs by selling a stripped- down version of Windows for one-third the price in markets such as Thailand and Russia. He's combined with Advanced Micro Devices Inc. to sell cheap computers with Windows in India and Mexico. Yesterday Microsoft announced it would block customers using counterfeit Windows from downloading some programs.

Net income a year earlier included $2.17 billion, or 20 cents a share, in stock-based compensation costs. Most of that stemmed from a plan that let employees sell options that couldn't be exercised profitably.

Even after paying out $32.6 billion in a one-time dividend in December, Microsoft had $34.5 billion in cash and short-term investments at the end of the quarter.

To contact the reporter on this story: Dina Bass in Seattle dbass2@bloomberg.net

Last Updated: January 27, 2005 18:12 EST