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Microsoft's Sales Jump, Feels Confident on Future

Microsoft earnings
UPDATED: Microsoft continues to see revenue trending upward, despite the tumultuous economic climate and concerns over IT spending.

The company today announced revenues of $15.06 billion for the first quarter of fiscal 2009, ended Sept. 30 -- an increase of almost $1.3 billion, or 9 percent, from the $13.7 billion it rang up during the same period a year ago.

The increase in year-over-year net income was less dramatic, however. That totaled $4.37 billion for the quarter, a rise of only $84 million, or about 2 percent, compared to the 2007 figure of almost $4.3 billion. Diluted earnings per share for the quarter came to 48 cents, on the higher end of analysts' expectations, and up from 46 cents compared to last year.

Wall Street analysts had expected earnings of 47 cents per share on revenue of $14.8 billion, according to Reuters Estimates.

"In a challenging economic environment, the first quarter results exhibit the strength and diversity of our business model," Chris Liddell, Microsoft's (NASDAQ: MSFT) CFO, said in a statement.

Echoing what other vendors and industry watchers have been saying in response to the financial crisis, Kevin Turner, Microsoft's chief operating officer, said customers "are asking how they can save money and do more with less."

Nevertheless, the company saw strength in multiyear contract sales from its client, server and business software units. Combined revenue for the groups grew more than 20 percent from last year, totaling $13.3 million during the quarter, compared to $11.8 million a year ago.

Positive guidance

Despite the economic conditions, Microsoft also offered positive guidance for the next quarter, ending Dec. 31. It expects revenue to be $17.3 billion to $17.8 billion and diluted earnings per share of between 51 cents and 53 cents.

For its full fiscal year, ending June 30, 2009, Microsoft predicts that revenue will be $64.9 billion to $66.4 billion; and diluted earnings per share to be between $2.00 and $2.10.

"We feel extremely good about our relative competitive position and our ability to continue outgrowing IT spend," Liddell said. "We believe our exceptionally strong cash flow, product pipeline and financial strength will allow us to weather economic conditions well."

Nonetheless, Liddell expressed concern about the uncertain economic conditions. "Our guidance now sees an outcome between a mild and a deeper recessionary environment," he said during a Webcast to discuss earnings with analysts.

The company also kept itself busy during the quarter, adding SQL Server 2008 and Hyper-V Server 2008 to its product lineup. It also issued its first service update to Microsoft Dynamics CRM Online.

Microsoft's shares were volatile in after-hours trading, hitting $22.65, up 33 cents, by press time.

Microsoft plans "to outgrow the overall IT market" and has three main areas of focus, Liddell said. These are providing high value at low total cost of ownership, increasing internal operational efficiency and investing in "key strategic opportunities," he explained.

Microsoft expects to be particularly competitive in the virtualization area. Liddell noted a recent IDC report that showed Microsoft's share of the x86 server virtualization market "climbed to nearly 25 percent" with its Hyper-V and SCVMM products.

In terms of international operational efficiency, Microsoft is "reassessing our business plan and pulling back spending in lower priority areas," including cutting head counts and marketing plans, expenditure on data centers and "other general savings including travel expenses and vendor expenses," Liddell said.

The company has cut its operational expenses by $500 million and is "putting in place other initiatives on a contingency basis that we can dial up or down as required," he added.

Microsoft is "continuing to grow our business in the long term," and will look for opportunities to buy other businesses that fit its road map, Liddell said. "Relatively speaking, we're still very cash rich and so are not constrained in terms of the capital point of view," he added.

Netbooks, good or bad?

Sales of Netbooks are growing fast, and Microsoft has not yet determined to what extent they are cannibalizing traditional PC sales or opening up new markets. Liddell said traditional PC shipments will be flat while growth in the Netbooks area will be "relatively robust."

Overall, Microsoft is confident about the future despite the financial meltdown. "We believe in strong cash flow, we're sitting on $25 billion in cash and that and our investments on hand will allow us to weather any economic recession better than others," Bill Koefeod, Microsoft's general manager, investor relations, said during the Webcast.

Update adds details from Microsoft's call with analysts on its earnings results.