Microsoft’s First Quarter Beats Expectations

A day after Microsoft delivered Windows 7, the company reported results for its first quarter of fiscal 2010 this morning that topped analysts’ expectations, though revenues were down significantly from the same period last year.

For the quarter ended Sept. 30, Microsoft (NASDAQ: MSFT) posted $3.57 billion in net income — a drop of 18 percent from a year ago — with earnings per share (EPS) totaling $0.40.

That’s well above Wall Street expectations: Thomson Financial consensus had analysts projecting Microsoft to deliver EPS of $0.32 for the quarter — down slightly from $0.34 the company delivered in the previous quarter, and a considerable drop from same time last year when Microsoft brought in $0.48 EPS.

During its most recent quarter, revenue totaled $12.92 billion, down 14 percent from a year ago. Revenue also declined from the $13.1 billion Microsoft posted in its previous quarter. Its latest performance still beat analysts’ revenue projection of $12.37 billion, however.

The company’s first-quarter numbers included a deferral of $1.47 billion in revenue related to the Windows 7 Upgrade Option program, along with Windows 7 sales to OEMs and retailers before general availability. That translated to an impact on diluted shares of $0.12, bringing EPS up to $0.52, an increase of 8 percent year-over-year.

Adding back the deferred revenue brought total revenue in at $14.39 billion, a year-over-year decline of 4 percent.

During the quarter, Microsoft reported operating income of $4.48 billion, up from $3.99 billion last quarter, but down 25 percent from the $6 billion the company notched in the same quarter a year ago.

Where Microsoft made money

Company executives credited a surge in demand for new PCs by consumers, as well as Xbox 360 consoles and games sales, with helping to shore up Microsoft’s earnings.

“Halo 3 was the No. 1 console game in the U.S. last month,” Bill Koefoed, Microsoft’s general manager of investor relations, told financial analysts during the company’s earnings call today.

PC sales — and concomitant sales of Windows — were the biggest surprise, however.

“Q1 represented the highest number of Windows sales ever,” Koefoed said.

The results come just a day after CEO Steve Ballmer announced broad-scale commercial availability of Windows 7.

Thursday’s Windows 7 announcement may explain why Microsoft chose to release its earnings before the markets opened Friday morning, instead of following its usual practice of announcing its numbers after the markets close for the day on a Thursday.

As a result of its official launch only yesterday, Microsoft felt little impact from the run-up to Windows 7 during the quarter. Preorders for Windows 7 were “extremely good,” CFO Chris Liddell said during the call, but those sales only accounted for a small contribution to Microsoft’s bottom line during first quarter.

Second quarter: Windows 7 and an eye on the EC

That may change before long, however. Citing strong analyst predictions for an earlier-than-usual start to corporate adoption of Windows 7, Liddell expressed confidence in the recovery of the PC market, which has been ailing since this time last year.

“The biggest variable, in my mind, is business PCs,” Liddell said. “Eventually those PCs wear out and have to be replaced [so] we feel pretty good about the PC market.”

Most of the presales volume for Windows 7, though, has been on the consumer side, he added.

Looking ahead to second quarter remains a somewhat murky affair. Microsoft has not returned to providing guidance to analysts and investors — a practice it suspended when it reported its second-quarter earnings for fiscal 2009 last January.

Analysts’ forecasts for the current quarter, which encompasses the all-important holiday sales season, have Microsoft bringing in $17.14 billion in revenue and EPS of $0.52.

Microsoft is also pushing to settle its antitrust problems with the European Commission (EC) by the end of the calendar year. That’s likely to result in behavioral and technological changes — like the ability for users to select which pre-installed Web browser they want with Windows — to make it easier for rivals to compete. However, those actions won’t necessarily remove the the specter of a fine from the EC that may reach into the billions of dollars.

Microsoft’s results cheered Wall Street. The company’s stock was up 8.2 percent at $28.77 in early trading.

Update adds comments from earnings call.

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