Good Numbers Boost Microsoft

There were also higher expenses associated with Microsoft's extension of the Xbox warranty to one year from 90 days, the company said.

Why the forecast was cut so sharply isn't clear, though Liddell made references to unsold Xboxes still in the distribution channel and Microsoft's desire to make the entertainment unit profitable by 2008.

One division that did not perform terribly well was online services. Revenue grew 5%, but it turned from a profit of $58 million to a loss of $155 million in the quarter.

Beyond the Xbox news, Microsoft's guidance held few surprises. The company said revenue will range from $13.7 billion to $14 billion, with an EPS expectation of 45 cents to 46 cents, including 12 cents related to the technology guarantee. Wall Street was looking for 46 cents a share in profit on sales of $13.99 billion.

Microsoft tweaked guidance higher for the full year and now forecasts revenue of $50.2 billion to $50.7 billion with EPS ranging from $1.45 to $1.47. Wall Street forecasts called for $1.45 a share and revenue of $50.4 billion.