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Investors Feed Off Microsoft

Solid sales guidance drives gains in the premarket session.
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Updated from 7:34 a.m. EST

In a lean season for tech titans,


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meaty sales guidance was sustenance for the Street.

Shares of the software giant rose nearly 3% Friday as investors looked past an unspectacular second quarter and ate up the estimate for sales in the current period. In early trading, the stock gained 73 cents to $27.23.

Guidance for the current, or third, quarter is for sales ranging from $10.9 billion to $11.2 billion, with diluted EPS of 32 cents or 33 cents. Analysts were projecting sales of $10.99 billion and a 33-cent-a-share profit.

The modest upside is in sharp contract to peers


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, each of which issued guidance that left the Street cold.

"Overall, we're happy with this," said Pat Becker Jr., portfolio manager for the $2.5 billion Becker Capital Management, noting that the midpoint of the company sales guidance is above analysts' estimates. Becker, whose company holds shares of Microsoft, said he had been concerned that sales could fall off if customers decided to postpone purchases until after the debut of the company's new version of Windows. But that didn't happen.

Shares of Microsoft have been stuck in the doldrums for three years, generally trading between $24 and $28 despite revenue growth, strong cash flow and a larger dividend. Some analysts figure that 2006 could be a breakout year because the company has its largest lineup of new products in some time.

In the just-completed second quarter, Microsoft grew revenue by 9% to a record $11.84 billion, but still fell a bit shy of Wall Street's expectations and didn't deliver the earnings upside that some were hoping for.

The world's largest software company posted a profit of $3.65 billion, or 34 cents a share, including a 1-cent-a-share tax benefit, which equaled the 33 cents a share consensus of analysts polled by Thomson First Call. Analysts were looking for sales of just under $12 billion.

Operating income in the quarter dropped by 2% to $4.66 billion, reflecting heavy investments for the company's new line of products, Microsoft said after the closing bell Thursday.

As expected, sales of the Xbox 360 were lower than Microsoft had hoped -- 1.5 million through the end of the quarter -- and the shortfall accounted for the revenue miss. But a third manufacturing partner will come on line next month and Microsoft still expects to ship 4.5 million to 5.5 million consoles by the end of the fiscal year in June.

The weak performance by the home and entertainment unit was partially offset by somewhat better-than-expected sales of business software, particularly SQL Server 2005, the newest version of Microsoft's database, which grew by 20%.

Windows SQL Server 2005 debuted in November, and more importantly, Microsoft expects to ship Vista, a new version of its franchise-defining Windows operating system, and a new version of the Office productivity suite during the second half of the year. Although there has been speculation that the Vista launch could slip into 2007, CFO Chris Liddell stuck to the second-half estimate, although he declined to be more specific about the timing when asked on a conference call following the earnings announcement.

The company said its client division, which sells Windows, posted revenue of $3.45 billion for growth of 8.3%, and posted a profit of $2.63 billion, which was about what the company had forecast, according to Colleen Healy, senior director of investor relations. The Information Worker group, which sells the Office suite, grew by 5.5%.

Liddell said PC sales should grow by a bit more than the company had expected earlier; Microsoft now foresees computer sales increasing by 12% to 14% during the year, and spending on information technology will remain healthy, he said. Because Microsoft's software ships on more than 90% of the world's PCs, the company estimate for its sales is closely watched.

MSN, Microsoft's entry in the highly competitive world of Internet searching and advertising, did not do as well as the company's core business groups. Its revenue declined by 2% and profit plunged by 55% to $58 million.

Microsoft Business Solutions, which sells business-class software, did better than expected, growing revenue by 17%, with a boost from sales of its latest customer relationship management software.