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Microsoft Up Modestly

It beats estimates but guides second-quarter earnings lower.

Updated from Oct. 26

Strong sales of databases helped


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beat expectations on the top and bottom lines in its fiscal first quarter, but the company's second-quarter earnings will likely be on the light side.

In early Friday trading, Microsoft's stock rose 28 cents, or 1%, to $28.63.

The software giant said after Thursday's close that it earned $3.48 billion, or 35 cents a share, compared with $3.14 billion, or 29 cents a share (including a 2-cent legal charge) in the year-ago quarter.

Revenue was up 11% to $10.81 billion.

Analysts polled by Thomson First Call were looking for a 31-cent profit on sales of $10.75 billion.

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The company's server and tools division grew year-over-year revenue by 17%, including 30% growth for the company's SQL Server database business. The division earned $2.6 billion, compared with $2.5 billion a year ago.

The entertainment and devices division, which includes the Xbox 360 business, grew revenue by a strong 70%, to $1 billion, and sharply narrowed its loss. The division lost $96 million, down from $173 million a year ago. CFO Chris Liddell attributed the better margins to decreasing component costs and to better attach rates for higher-margin gaming software.

Paradoxically, though, stronger-than-expected sales of Xbox 360 consoles, on which the company still loses money, contributed to Microsoft's 2-cent miss on earnings guidance in the December quarter.

Even so, Microsoft executives seemed pleased with the division's results, noting that it represents a step away from the company core business of desktop software.

To date, the company has sold 6 million of the game consoles. Microsoft expects the division to become profitable in fiscal 2008.

Looking to the December quarter, the company told investors to expect revenue to range from $11.8 billion to $12.4 billion, which reflects $1.5 billion of deferred revenue from sales of Vista upgrade coupons. Analysts were projecting revenue of $13.5 billion, but that number did not include the additional deferred revenue.

The deferral, announced earlier this week, is related to the company's decision to give upgrade coupons to customers who buy Windows or Office before the newest versions of those products are available.

Vista, the first new version of Windows in five years, is scheduled for sale next month to business customers and to consumer buyers in January. The company indicated that those products are running on time, as is Longhorn, the server version of Windows, which is due out in calendar 2007.

The company expects to post a second-quarter EPS of 22 cents to 24 cents, including 11 cents of deferred revenue. Wall Street was looking for 37 cents a share. Even at the high end, that would compare with non-GAAP earnings of 35 cents a share, suggesting a 2-cent-a-share shortfall.

For the full year, the company expects revenue to range from $50 billion to $50.9 billion, bracketing First Call expectations of $50.2 billion. EPS will range from $1.43 to $1.46, compared with expectations of $1.44.