April 27 (Bloomberg) -- Shares of Microsoft Corp. rose the most in three months after the world's biggest software maker reported a 65 percent jump in third-quarter earnings and forecast sales in the next year that may exceed analysts' estimates.

The stock advanced $1.02, or 3.5 percent, to $30.12 at 4 p.m. New York time in trading on the Nasdaq Stock Market. The increase boosted the company's market value by about $10.1 billion to $297 billion.

Microsoft allayed investor concern profit in the year beginning July 1 would fall short because of rising costs and lower Windows revenue. The forecast may help the stock, which had fallen 6.7 percent during the third quarter as shareholders said the release of Windows Vista and Office 2007 may not produce enough sales to meet estimates.

``The forecast they gave out clearly damps concerns on the stock,'' said Patrick Becker Jr., who oversees $2.5 billion, including more than 1 million Microsoft shares, at Portland, Oregon-based Becker Capital Management. ``There was a bit of a bear case on Microsoft. Even Intel Corp.'s CEO Paul Otellini mentioned he thought the Vista cycle was a year away.''

Analysts at CIBC World Markets and Citigroup Inc. raised their ratings on Microsoft shares after the report. CIBC boosted them to ``sector performer'' from ``sector underperformer,'' while Citigroup elevated them to ``buy'' from ``hold.''

Microsoft Chief Executive Steve Ballmer darkened investors' view of Vista in February when he told analysts some of their growth estimates for the coming year were ``overly aggressive.'' Otellini, head of the world's largest chipmaker Intel, told analysts last week that most companies won't start deploying Vista until at least October or November.

Analysts' Take

Since then, analysts made sufficient cuts to their estimates to be in line with Microsoft's forecasts, Chief Financial Officer Chris Liddell said. Some analysts also didn't take into account a change in the way Microsoft accounts for Windows revenue, he said in an interview. That will boost sales by $660 million next year and put Microsoft's forecast ahead of the analysts.

With the fourth-quarter guidance ``looking conservative, we expect the stock to trade well as we get further into the Office, Vista and Server product cycles this fall,'' J.P. Morgan Securities Inc. analyst Adam Holt said today in a report.

Microsoft said sales next year will rise to $56.5 billion to $57.5 billion, which may exceed the $56.6 billion average analyst estimate. Profit will be in line, increasing to $1.68 to $1.72 a share, compared with an estimate of $1.70.

Office

Net income for the third quarter climbed to $4.93 billion, or 50 cents a share, from $2.98 billion, or 29 cents, a year ago, beating the 46-cent average projection of 20 analysts surveyed by Bloomberg. Sales increased 32 percent to $14.4 billion, the company said today.

Sales of Windows and Office software surged, helped by $1.67 billion in orders held over from the previous quarter for accounting reasons.

Vista pushed revenue in the unit that sells Windows for PCs to exceed Microsoft's forecast by $300 million to $400 million last quarter, Liddell said. Sales of Office 2007 spurred results in the business division that beat company forecasts by $200 million, he said.

``The negativity on Vista was just so horrible that this has got to look better,'' said Jane Snorek, a portfolio manager at First American Funds in Minneapolis, which invests $55 billion, including Microsoft shares. ``Microsoft is seeing good Vista uptake and healthy Office '07 uptake.''

Share Declines

Microsoft's share decline in the quarter compares with the 0.2 percent gain in Standard & Poor's 500 Index. The stock had beaten the benchmark index the two previous earnings periods on enthusiasm for Vista.

Investor sentiment on the stock has been ``horrible,'' Sarah Friar, who started covering the company for Goldman Sachs during the quarter, said in an interview before the earnings. When the San Francisco-based analyst removed Microsoft from Goldman's ``conviction buy'' list April 10, she said clients asked why she left the rating as a ``buy.''

Questions remain about Microsoft's ability to build Internet businesses that can deflect attention and sales from Google Inc. Ballmer, 51, is boosting spending as Microsoft works to draw more users to its Internet services and develop its search engine to compete with Google.

Earned a Billion

The value of Ballmer's stake rose about $416.4 million thanks to today's stock gain, based on shareholder data compiled by Bloomberg. Founder and Chairman Bill Gates's share climbed about $936.3 million.

Cost of goods sold will rise more than $600 million in fiscal 2008 as the company expands networks to run Internet services. Operating costs will also increase on investment in new initiatives and ongoing spending on Microsoft's online unit, Ballmer said.

Catching Up?

Friar, in her April 10 note initiating coverage on Microsoft, said Google and Yahoo! Inc. ``continue to out-execute and outmaneuver Microsoft,'' requiring significant investments from the company in a bid to catch up.

This lifts the concern that has been plaguing the stock for the past few weeks, said Kim Caughey, an analyst at Pitt Capital Group Inc., which manages $1.1 billion including Microsoft shares in Pittsburgh ``What remains is the longer-term concern -- is Google going to eat Microsoft's lunch.''

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

Last Updated: April 27, 2007 16:12 EDT