Microsoft’s Profits Beat Wall Street Prognosis

The world’s largest software maker Microsoft Corp. reported a smaller drop in profit than Wall Street analysts forecast after slashing costs to make up for falling sales. The stock had its biggest jump in six months on the Nasdaq.

First-quarter net income fell to $3.57 billion, or 40 cents a share, beating the 32-cent average estimate of analysts surveyed by Bloomberg. Revenue, excluding $1.47 billion deferred to a future quarter, was $12.9 billion, Microsoft said today in a statement. The company boosted its cost-reduction target.

Operating costs fell 6.9 percent after Microsoft made its first companywide firings, slashed travel expenses and cut the rates it pays vendors to cope with slower spending by business customers. Demand from consumers helped sales of Windows for personal computers and the Xbox to exceed the estimates of Goldman Sachs Group Inc. analyst Sarah Friar, Bloomberg reports.

It was also reported, while the quarterly results looked good to Wall Street, they also showed how much Microsoft is still wrestling with a PC industry that remains much weaker than a year ago. In the past year the software maker resorted to its first wide-scale layoffs, and in July it said its annual revenue had fallen for the first time since the company went public in 1986.

After skidding for six months, computer shipments rose in the July-September period. But shoppers tended to buy inexpensive laptops and even smaller, cheaper netbooks, which have older and less profitable versions of Windows installed. Many consumers also passed on buying Microsoft's Office, the package that includes Word, Excel and Outlook, which contributed to a 14 percent total decline in revenue in the quarter.

Businesses watched their spending even more closely. That dragged down Windows results because business-level versions of the operating system are more expensive. And companies that have cut workers are ordering fewer copies of Office and other Microsoft software commonly used at work. Revenue and profit in the group that makes Office sank even as businesses spent more on newer software such as Sharepoint.

Chris Liddell, Microsoft's chief financial officer, said in a conference call that businesses could start replacing aging PCs and servers starting in 2010, "although it could be gradual and occur over a couple of years," The Associated Press reports.

Meanwhile, this year, Microsoft signed an Internet search and advertising partnership with Yahoo Inc. (YHOO 17.22, -0.45, -2.55%) to effectively team up on Google. Under the terms

of the deal, both companies would use Microsoft search technology, while Yahoo focuses on advertising sales. The partnership is being reviewed by antitrust regulators.

The entertainment and devices division, which includes the Xbox console, posted $1.89 billion in revenue for the quarter, roughly flat compared to the period last year. The division posted an increased profit, however, of $312 million, compared to $159 million.

Microsoft's earnings report arrived hours after the general release of Windows 7.

The company is counting on the newest version of its flagship product to restore faith among customers and partners, following a generally poor reception for its predecessor, Windows Vista, MarketWatch reports.

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