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Microsoft Profit Beats Analysts’ Estimates on Cost Controls

Microsoft Corp. (MSFT)’s third-quarter profit exceeded analysts’ estimates, buoyed by cost controls and sales of business and server software amid weak demand for personal computers running the new Windows 8 operating system.

Net income in the period that ended March 31 rose 19 percent to $6.06 billion, or 72 cents a share, Microsoft said yesterday in a statement. That beat the 68-cent average projection of analysts, according to data compiled by Bloomberg. Revenue rose 18 percent to $20.5 billion, matching estimates.

Chief Executive Officer Steve Ballmer kept expenses in check at the world’s largest software maker, while sales of Office collaboration and teleconferencing programs climbed. That blunted the impact of a drop in quarterly PC sales -- the steepest decline on record, according to market-research firm IDC, which cited lackluster demand for Microsoft’s new operating system for the slump.

“I was expecting a foot of snow and we just got a flurry,” said Brent Thill, an analyst at UBS AG, referring to the better-than-estimated profit. “They have pretty strong cost controls in place. Wall Street thinks they’re a PC play, but there’s a lot more to Microsoft than PCs. There are certainly elements to the story that are working to offset the PC exposure.”

Photographer: Andrew Harrer/Bloomberg

Microsoft Chief Executive Officer Steve Ballmer kept expenses in check while sales of Office collaboration and teleconferencing software increased. Close

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Photographer: Andrew Harrer/Bloomberg

Microsoft Chief Executive Officer Steve Ballmer kept expenses in check while sales of Office collaboration and teleconferencing software increased.

Microsoft said operating expenses for its next fiscal year, which starts July 1, will be $31.6 billion to $32.2 billion -- the company’s first forecast for the coming year. For the current year, expenses will be $30.2 billion to $30.5 billion, lower than the company’s previous target of $30.3 billion to $30.9 billion.

CFO Departing

Microsoft rose 3.4 percent to $29.77 at the close in New York. The stock has gained 11 percent this year, compared with a 9 percent increase in the Standard & Poor’s 500 Index.

Chief Financial Officer Peter Klein will step down at the close of the fiscal year, which ends June 30, Microsoft said in the statement.

So-called unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $17.9 billion in the third quarter, compared with the $17.8 billion average analysts’ projection, according to data compiled by Bloomberg.

Global PC unit shipments slid 14 percent in the first three months of the year, IDC said last week. PC sales are falling faster than Microsoft can gain revenue from tablet machines, Klein said in an interview. That will continue in the near future and weigh on sales of Windows software, he said.

“That’s certainly had an impact on the Windows business,” Klein said. “Our diversified business is allowing us to deliver solid financial results while we work through that process.”

Windows 8

Microsoft released Windows 8 and the Surface tablet, its first hardware product, on Oct. 26 to stem the loss of PC sales as smartphones and tablets attract users with many of the same features.

In the period that ended in March, every PC maker except China’s Lenovo Group Ltd. (992) saw shipments decline as businesses chose to install Microsoft’s older Windows 7 operating system on existing PCs instead of buying systems with Windows 8, Jay Chou, an analyst at Framingham, Massachusetts-based IDC, said in an interview last week.

Microsoft’s Windows division sales rose 23 percent to $5.7 billion, less than the $5.9 billion predicted by analysts. Excluding the impact of revenue from previous quarters, Windows sales were unchanged from a year earlier, the company said.

“That’s not bad, considering PCs were down 14 percent,” said Brendan Barnicle, an analyst at Pacific Crest Securities LLC who rates Microsoft shares sector perform.

Surface Sales

As for the Surface tablet, Microsoft has sold little more than a million of the lower-end RT version and about 400,000 Surface Pros since their debut, three people with knowledge of the company’s sales said in March. The company had ordered about 3 million Surface RTs, the people said. Microsoft hasn’t disclosed Surface sales.

For the long term, Windows 8 is the right product to help Microsoft gain share in tablets, Klein said. The difficulties in the Windows business and the shift to a bigger percentage of Windows sales coming from tablets “will continue through several selling seasons,” he said yesterday.

Klein declined to comment on Surface sales or on how many copies of Windows 8 have been sold. The company has yet to prove that tablets will be a significant business as PC sales slow, said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle.

“There is some uncertainly around whether they can actually get consumers to buy Windows tablets,” Parakh said. “It’s a show-me story now. Show me that you can actually sell these devices.”

Windows Blue

On a conference call with analysts, Klein said the company is working on a new version of Windows, code-named Blue, that will address customer feedback on Windows 8, as well as developing smaller, cheaper touch-enabled Windows devices with computer-maker partners.

While the better-than-projected earnings were welcome, Microsoft was able to exceed estimates in part because analysts had reduced their predictions in the past several weeks, said Pat Becker Jr., a fund manager at Becker Capital Management in Portland, Oregon, who owns Microsoft shares.

Analysts’ average estimates for Microsoft’s profit had declined 11 percent in the past four weeks. At least five downgraded their recommendations on Microsoft’s stock in the past two weeks.

Corporate Customers

Still, Becker said he is encouraged by demand among corporate customers for products like Office software and the older Windows 7 operating system.

“It’s a good business,” he said. “You see it in the numbers for the quarter, you see it in the cash balances going up. At the base of everything, they have a very strong enterprise business.”

Sales in the Business division, which includes mostly Office software, and in the server unit were largely in line with the average estimates of analysts polled by Bloomberg. Microsoft said its Internet-based version of Office, Office 365, is bringing in revenue at an annualized rate of more than $1 billion.

The Online division, which includes the Bing search engine and Internet display advertising, and Xbox gaming unit both posted better-than-projected sales. Klein said Microsoft’s products other than Windows have “a lot of headroom” to grow and shore up results while Windows struggles.

Klein, who said he’s leaving Microsoft to spend more time with his family and doesn’t have immediate plans, said he’ll be replaced by a new CFO from Microsoft’s internal finance team in the next several weeks.

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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