Microsoft profit rises 2%, but outlook soft

Microsoft Corp. said Thursday its fiscal first-quarter profit edged up 2 percent, buoyed through economic uncertainty by corporate customers that renewed licenses for servers and other business programs.

Microsoft shares rose in extended trading following the report, a sign that many investors had been worried it would be worse.

“We, like most companies, saw a slowdown at the tail end of the quarter in particular,” Chief Financial Officer Chris Liddell said in an interview. “We're now taking a more conservative stance on the balance of the year.”

Liddell said the worst hit among Microsoft's customers in the just-concluded quarter were small and medium-sized businesses that “perhaps are more affected by the credit squeeze and who perhaps make decisions on a month-by-month basis.”

In the three months that ended Sept. 30, Microsoft's earnings rose to $4.37 billion, or 48 cents per share, from $4.29 billion, or 45 cents per share in the same period last year.

Sales improved 9 percent to $15.1 billion.

Microsoft beat Wall Street's expectations on both counts. Analysts, on average, predicted the Redmond, Wash.-based company would earn 47 cents per share on $14.8 billion in sales, according to a Thomson Reuters survey.

The software maker highlighted a 20 percent jump in sales of multiyear contracts to businesses, which helped boost revenue for Microsoft's server software group and the division that makes Office productivity software.

The server group's profit increased 20 percent to $1.2 billion, while the division responsible for Office software saw earnings jump 23 percent to $3.3 billion.

The Windows division's profit, on the other hand, slipped 4 percent to $3.3 billion. Microsoft, which recently launched a massive new advertising campaign to trumpet Windows' virtues, attributed the decline to higher marketing expenses. It also added an unspecified number of people to Windows' research and development team.

Microsoft also said revenue from PC makers like Dell Inc. and Hewlett-Packard Co. sank 1 percent as those companies bought a smaller percentage of higher-priced “premium” versions of Windows Vista.

Microsoft's online division widened its loss in the quarter to $480 million from $270 million last year. Liddell said Web advertising revenue improved 15 percent, with search ads bringing in more than graphical “display ads.” That's much stronger than the 1 percent gain Yahoo Inc. reported this week in its online ad revenue.

Microsoft's outlook for the current quarter was lower than expected because of an across-the-board slowdown, not pain in one particular area, Liddell said. Microsoft expects to earn 51 to 53 cents per share, on sales of $17.3 billion to $17.8 billion. Analysts were predicting a profit of 55 cents per share on $18 billion in sales.

Shares of Microsoft gained 45 cents, or 2 percent, to $22.77 in after-hours trading, after adding 79 cents, or 3.7 percent, to end regular trading at $22.32.