Microsoft Shares Rise as Profit Boosted by Business Sales

Microsoft Corp. (MSFT), the world’s largest software maker, rose the most in three months after it reported fiscal third-quarter profit that topped estimates on better-than-expected sales of Windows and Office software for businesses.

Net income slipped to $5.11 billion, or 60 cents a share, from $5.23 billion, or 61 cents, a year earlier, Redmond, Washington-based Microsoft said yesterday in a statement. Analysts had predicted an average 57 cents in profit, according to estimates compiled by Bloomberg. Sales rose 6 percent to $17.4 billion, beating the $17.2 billion average projection.

Microsoft, whose Windows business had missed analyst estimates in four of the prior five quarters, surprised investors with better-than-expected results as corporate demand for Windows computers made up for tepid interest from consumers opting for tablet machines. The company plans later this year to release Windows 8, the newest version of its operating system, to help it win back consumers and narrow Apple Inc. (AAPL)’s lead in the tablet market.

“It’s been a while since Windows did better than the broader PC market,” said Pat Becker Jr., a fund manager at Becker Capital Management (NLY) in Portland, Oregon, who owns Microsoft shares. “Those trends we’ve seen over the past year that the corporate market has been robust continued into Q1.”

Product Debuts

Microsoft shares increased 4.6 percent to $32.42 as of the close in New York, for the biggest advance since Jan. 20. The stock has climbed 25 percent this year.

“I’d characterize it as jumping high over a low hurdle,” Rick Sherlund, an analyst at Nomura Equity research, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “We’re really waiting for these new products to ship and to really reinvigorate the whole PC market.”

Microsoft gave its first look at operating-cost projections for the fiscal year that starts July 1, saying expenses will be $30.3 billion to $30.9 billion.

That’s a gain of as much as 8 percent, higher than this year’s increase, as the company plans for costs related to product debuts in Windows and Office, Microsoft Chief Financial Officer Peter Klein said in an interview.

In the current year, expenses will be $28.3 billion to $28.7 billion, lower than a January forecast of $28.5 billion to $28.9 billion.

Expenses are under renewed scrutiny because Microsoft’s revenue growth is slowing, said Colin Gillis, an analyst at BGC Partners LP in New York, who recommends buying Microsoft shares.

Windows Gaining

Sales in the current fiscal year are predicted by analysts to rise 6 percent, compared with 12 percent in 2011.

“It’s all about cost discipline because revenue growth isn’t great,” he said.

Unearned revenue, a measure of future sales, was $15.2 billion, above the $14.9 billion average estimate compiled by Bloomberg. Profit in the year-ago quarter was boosted by a 5- cent-a-share tax benefit.

Windows division sales rose 4 percent to $4.62 billion, compared with the $4.2 billion average estimate, according to data compiled by Bloomberg. That was the fastest growth since the quarter that ended Sept. 30, 2010, Microsoft said.

“We are seeing year-over-year growth in Windows again, and it’s actually looking like it’s growing faster than PCs,” said Brendan Barnicle, an analyst at Pacific Crest Securities LLC in Portland, Oregon, who has a neutral rating on the shares.

Office Outpaces

Revenue in the Business division, mostly from Office software, rose 9.1 percent to $5.81 billion. That shows that demand for Office 2010 software, which was released in mid-2010, has persisted longer than would be expected for an almost two- year-old product, Microsoft’s Klein said. Analysts on average had projected $5.6 billion.

Office has “frankly been better than you would normally expect at this point in the cycle,” he said.

The Windows division was bolstered by purchases of Windows 7 software from enterprise customers. Shipments of corporate machines rose 8 percent, while consumer demand was flat, Klein said.

The increase in Windows sales was greater than the overall increase in PC shipments reported by Gartner Inc. (IT) PC shipments were better than expected in the first quarter, according to market-research firm Gartner, rising 1.9 percent, instead of the 1.2 percent drop Gartner had forecast. The PC market is shaking off the impact of the European debt crisis and a disk-drive shortage resulting from last year’s flooding in Thailand.

Households that used to purchase cheap netbook computers are switching to such devices as tablet computers, he said. A new iPad went on sale last month and sold 3 million units in its debut weekend.

Windows 8 Cometh

Microsoft probably won’t be able to alter that trend until Windows 8 ships, Klein said in January.

While the company has declined to say when Windows 8 will go on sale, people with knowledge of the matter said last month that Microsoft will finish work on the product this summer and put it on sale around October.

Another area of consumer weakness showed up in the division that includes Xbox, where sales declined 16 percent to $1.62 billion, below analysts’ average estimate for sales of $2.1 billion. In what Microsoft termed a “soft” console market, the company sold only 1.4 million Xbox 360 machines, down 48 percent from the year-ago quarter.

Microsoft doesn’t plan to market a new version of its gaming console until 2013 at the earliest, people with knowledge of the matter said last month. That means Microsoft will need to squeeze a few more quarters of sales from the device, and that weaker demand for the current machine is a concern, Barnicle said.

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

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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