Microsoft Profit Jumps; Sales Climb Most in Two Years

Microsoft Jumps
Steve Ballmer, chief executive officer of Microsoft Corp. Photographer: Munshi Ahmed/Bloomberg

Microsoft Corp., the world’s largest software maker, posted its biggest sales gain in 2 1/2 years in the fourth-quarter after customers purchased more personal computers running the Windows operating system.

Net income climbed 48 percent to $4.52 billion, or 51 cents a share, exceeding the 46-cent average of analysts’ estimates compiled by Bloomberg. Sales advanced 22 percent to $16 billion, the company said today in a statement.

Microsoft is benefitting from a recovery in spending as large businesses buy new PCs and servers. The company said today it has sold 175 million copies of the latest flagship product, making Windows 7 the fastest-selling operating system in the history of the Redmond, Washington-based company. Global PC shipments jumped 21 percent last quarter, according to research firm Gartner Inc.

“It’s pretty clear that there is both a PC and server buying cycle and Windows 7 is a winner,” said Katherine Egbert, an analyst at Jefferies & Co. in San Francisco, who advises buying Microsoft shares. “People are obviously buying it despite all the hype around Apple.”

Microsoft was little changed in after-hours trading after climbing 72 cents, or 2.9 percent, to $25.84 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have dropped 15 percent this year.

Analysts had predicted Microsoft would have total sales of $15.3 billion in the quarter, which ended June 30.

Apple Inc., which competes with Microsoft in operating systems for computers, tablets and mobile phones, reported quarterly sales this week of $15.7 billion, topping estimates.

Renewal Rates Rise

Microsoft said operating expenses for the year starting July 1 will be $26.9 billion to $27.3 billion, down from its March forecast of $27 billion to $27.5 billion. Microsoft no longer provides projections for sales and profit.

Fourth-quarter unearned revenue, a measure of multiyear contracts, was $14.8 billion, above the $14.7 billion estimate of Heather Bellini, an analyst at ISI Group in New York.

Signs of demand by businesses for bigger purchases improved in the quarter. Renewal rates of multiyear enterprise agreements reached the highest rate for the year, returning to Microsoft’s historical average of 66 percent to 75 percent, Chief Financial Officer Peter Klein said in an interview. The company doesn’t provide a more specific figure. Billings, a measure of future revenue, grew 27 percent, he said.

Sales of agreements that have been signed but for which customers haven’t yet been billed rose to about $15 billion, Microsoft said. That’s from about $13.5 billion at the end of the third quarter.

‘More Evidence’

Revenue in the Windows division was $4.55 billion, above the $4.3 billion estimate of Brent Thill, an analyst at UBS AG in San Francisco. Microsoft Business Division sales, made up mostly of Office software, were $5.25 billion, compared with Thill’s $5.05 billion projection.

“It sounds like enterprises are buying Windows 7 and will roll it out at some point,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who recommends buying the shares and doesn’t own any himself. “We’ve seen more and more evidence of a recovery in enterprise spending.”

Server software revenue was $4.01 billion. Thill had estimated $3.85 billion.

Entertainment and Devices, the unit that includes Xbox and mobile phones, came in at $1.6 billion in sales. Thill had expected sales of $1.58 billion.

Online Sales

The Online Services unit had sales of $565 million, short of Thill’s $589 million prediction. Microsoft’s Bing Internet search engine gained a percentage point of U.S. market share in the quarter, rising to 12.7 percent, according to ComScore Inc. in Reston, Virginia. That compared with 62.6 percent for Google Inc. and 18.9 percent for Yahoo! Inc., which is switching over to using Bing’s technology.

Global PC shipments industrywide rose 21 percent in the second quarter, Gartner said, beating the firm’s projection of 19 percent. Intel Corp., the world’s biggest chipmaker, posted record second-quarter sales last week and said corporate spending is strengthening.

Information-technology spending will climb 7.8 percent worldwide in 2010, according to an estimate from Forrester Research Inc.

In the year-earlier fourth quarter, Microsoft posted profit of $3.05 billion, or 34 cents a share, on sales of $13.1 billion. Net income in that period included legal expenses, severance costs and impairments to investments.

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