Sales Up, Profit Off: Microsoft Looks to Vista

Microsoft   posted robust earnings results for its fiscal second quarter, helped by healthy sales of xBox gaming devices and some server lines. But investors looked at a glaring drop in net income compared to the same time last year and saw the cost of delays with Vista, its next operating system poised for consumer release next week.

For the quarter, which ended Dec. 31, Microsoft’s net income was $2.63 billion (26 cents per share), a 28 percent drop over the same quarter last year when its profit was $3.6 billion (34 cents per share).

Revenues were $12.5 billion, a 6 percent jump over the same, year-ago quarter’s sales of $11.8 billion.

Microsoft’s CFO, Chris Liddell, noted strength in sales within the PC hardware market sector during the holiday selling quarter. He also pointed to encouraging signs of early demand for Office 2007, on tap for full release next week, as well as Exchange server and, the granddaddy product of them all: Vista, the long-awaited next generation of its Windows operating system for consumers.

But in this quarter, xBox results stood out. Revenues in Microsoft’s entertainment division jumped by 75 percent to just under $3 billion in sales, compared to $1.6 billion in the same time last year.

On the downside, operating income loss in the entertainment and devices division widened to $289 million from the year-ago loss of $286 million. Client sales also fell by 24 percent to $2.6 billion over the year-ago quarter of $3.4 billion.

Servers and tools sales were strong, rising by 16 percent to $2.8 billion. Operating income for the division jumped by 34 percent to just over $1 billion.

With the consumer launch of Vista, Office 2007 slated for next Tuesday, Microsoft was staying optimistic but cautious about expectations for how it would be received in sales.

The Vista launch is a different event compared to the launch of Windows 95 a decade ago, Liddell said during a conference call to discuss the results. “We think it [will be] a more gradual adoption in overall sales.”

If the product is extremely well received and Microsoft sees external strong demand, that could flow through to guidance, he said. But for now, executives were sticking to a wait and see approach on the Vista impact on revenue outlook. It also eased off on inventory expectations for xBox, saying it expected sales of 12 million by the end of June, about one million to three million less than previous estimates.

Overall, Liddle added, results for the quarter “exceeded our expectations across the board, with revenue growth at or above our high end guidance for all divisions.”

Shares of Microsoft had risen by 55 cents to $31 in after-hours trading.

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