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Microsoft: Strong Windows demand helps earnings

In reporting quarterly earnings, the company says demand for its Windows operating systems and Xbox game console exceeded expectations.

Microsoft said strong demand for Windows and Xbox buoyed the company's financial results in the past quarter.

The software maker said Friday that it earned $3.57 billion, or 40 cents per share, on revenue of $12.92 billion for its fiscal first quarter, which ended September 30. Microsoft also deferred $1.47 billion in revenue ahead of the launch of Windows 7. Adding that back in, revenue would have been $14.39 billion and per-share earnings would have been 52 cents.

Those results topped forecasts, although sales are still down from a year ago.

"We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows," Chief Financial Officer Chris Liddell said in a statement. "We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions."

Chris Lidell,
Microsoft CFO" credit="Microsoft" />

On the Windows front, Microsoft saw the number of PCs shipping with Windows grow 6 percent in the quarter even though PC sales overall were anywhere from flat to up 2 percent. Microsoft cited, among other reasons, the fact that more Netbooks are using Windows compared with a year ago.

Overall demand for Windows was strong, the company said, with the software seeing its highest first-quarter unit sales ever and September being the strongest overall unit sales in the company's history.

The company sold 2.1 million Xbox consoles in the quarter, according to a PowerPoint chart posted on Microsoft's investor Web site. That's just slightly down from the 2.2 million units sold in the same quarter a year ago, but up from the 1.2 million consoles sold in the previous quarter.

In a conference call, Liddell said that the company sees the economy remaining tough during the current fiscal year, but noted some potential for improvement.

The earnings report came a day after Microsoft launched Windows 7 and followed the disappointing previous quarter when the company reported weaker-than-expected results.

The company said Friday it is continuing to cut costs. In the current fiscal year, which runs through the end of June, Microsoft said it now expects operating expenses of $26.2 billion, a drop of $300 million from its prior forecast.

Microsoft normally releases its earnings in the afternoons, but it moved the report from Thursday afternoon so it wouldn't step on the toes of the Windows 7 launch.

The company continued to lose a significant amount in its online business, with the operating loss growing to $480 million from $321 million a year ago. Revenue for its online business, which includes Bing and MSN, dropped to $490 million from $520 million a year ago. However, Microsoft said it has seen a mid-single-digit increase in U.S. search revenue.

Looking ahead, Liddell said that Microsoft sees some signs that more businesses will buy new PCs starting next year, though the upgrade cycle will probably stretch over several years.

For the current fiscal year, Microsoft said it expects Windows sales to roughly reflect the PC market, while Office unit sales will lag. It expects its server unit to slightly outpace the overall market, while entertainment unit sale should be roughly flat. For its online business, Microsoft said it expects to outperform the broader market, excluding its MSN Internet access business.

Liddell said Microsoft continues to be hopeful that its search deal with Yahoo will gain needed regulatory approvals and be completed early in calendar year 2010. Liddell said to expect $100 million to $200 million in costs related to that deal, if it closes.

Here's a chart of last quarter's segment-by-segment results, though keep in mind that the Windows numbers are affected by the amount that Microsoft deferred because of the coming launch of Windows 7.


Update at 6:45 a.m. PDT: More details added throughout.
Update at 7:55 a.m. PDT: Added details from conference call with analysts.