Microsoft up after hours following earnings

Microsoft Stock price from October 1999 to present.

Source: Prophet Finance

Excluding charges, the software giant earned a fiscal first-quarter profit of $2.58 billion, or 46 cents a share, compared with $2.19 billion, or 38 cents a share, during the same period last year.

Microsoft was expected to earn 41 cents per share, according to a survey of analysts polled by First Call/Thomson Financial.

In after-hours trading, Microsoft's stock jumped to $56 from its close of $51.75, according to the Island ECN trading network.

In June, Microsoft executives lowered estimates for PC sales growth from a 15 percent to 20 percent range to a 12 percent to 15 percent range for the new fiscal year. Subsequently, analysts lowered their earnings estimates. For this quarter, the earlier consensus estimate was 43 cents, but then dropped to 41 cents.

Gartner analyst Neil MacDonald says Microsoft underestimated the amount of time it would take for the widespread adoption of Windows 2000 by businesses. see commentary

First-quarter revenue rose to $5.8 billion, up from $5.38 billion in the same period last year.

Microsoft chief financial officer John Connors said the profits came from strong sales growth in the desktop version of the Windows 2000 operating system for businesses and from "good" sales of Windows Me, the company's latest operating system for consumers. The company also earned money from the sale of two investments and spent less than the company expected on expenses, such as hiring fewer people than planned, executives said.

"This was the biggest Windows quarter in the history of Microsoft, in all flavors of Windows, in all forms of devices," Connors said in a conference call with financial analysts Wednesday. "Windows 2000 Professional and Windows Me exceeded our expectations."

Although Microsoft beat Wall Street estimates by 5 cents per share, Art Russell, an analyst at Edward Jones, said the profit from the two investments accounted for 3 cents per share. Microsoft recently made profits on the purchases of two companies, TransPoint and Titus Communications.

"It's a solid, but unspectacular quarter," Russell said. "The remaining 2 cents upside is from slightly better expense controls and revenue growth. We're seeing a good uptick in Windows 2000 sales, and the PC demand is fairly healthy, with the exception of Europe."

Connors said he expects revenue next quarter will reach $6.8 billion, a percentage growth in the high teens sequentially and in the low teens year-over-year. Connors reiterated that the company's revenue for the second half of fiscal year 2001 will reach the mid-teens in percentage growth. The company expects to earn 49 cents per share next quarter, he said.

"We expect business PC (sales) to continue to tick up in December and expect penetration of Windows 2000 to continue to increase," he said.

Earnings per share will be a few cents per share higher than the company's previous guidance of $1.88 per share for the fiscal year, he said.

For the first quarter, sales of desktop software, such as Microsoft Office, dropped from $2.21 billion last year to $2.14 billion this year.

Quarterly revenue from desktop platforms, which include desktop versions of Microsoft's operating systems, increased 13 percent, from $1.67 billion last year to $1.88 billion this year. Sales of enterprise software and services jumped 9 percent, from $949 million to $1.04 billion. Products in the category include the Windows NT Server and Windows 2000 Server operating systems, as well as e-business software.

Although consumer properties account for little of the overall revenue pie, Microsoft saw substantial growth come from this sector. Revenue from Microsoft's consumer software, services and devices--which include WebTV, the MSN portal site and gaming--rose 31 percent, from $366 million to $479 million.

Sales from consumer commerce investments, which includes the Expedia and CarPoint Web sites, increased more than fivefold, from $18 million to $97 million.

Including charges, the company earned 40 cents per share.

Microsoft had strong first-quarter sales growth in Asia and North and South America. First-quarter revenue in the Americas and the South Pacific region rose from $1.87 billion last year to $2.19 billion this year, while Asia sales grew from $593 million to $708 million. Sales in Europe, the Middle East and Africa dropped slightly, from $1.18 billion to $1.09 billion.

Shares of the software maker, which have tumbled nearly 57 percent for the year, fell to their lowest level in two years Monday on continued concern about the health of the PC industry.

Microsoft got a surprise boost last month after the U.S. Supreme Court ruled that a lower court would hear the company's appeal in its landmark antitrust case. The high court's order was seen as a victory for Microsoft because it promises to give the company an opportunity to defend itself in a court some see as more sympathetic.