Update: Microsoft beats forecasts with record revenue for Q2

It pointed to strong sales of Vista, Office 2007

Microsoft Corp. beat Wall Street expectations for both revenue and earnings per share (EPS) for its fiscal 2008 second quarter, attributing its strong quarter to sales of core client products such as Windows Vista and Office 2007, as well as Exchange and SharePoint server software.

For the quarter ended Dec. 31, Microsoft reported revenue of $16.37 billion, an increase of 30% year over year and a number that solidly beat the $15.95 billion in revenue that Thomson Financial analysts had estimated.

Last year for the same period, Microsoft reported $12.54 billion in revenue.

Diluted EPS were 50 cents, an increase of 92% over the 27 cents in EPS reported last year, and 4 cents higher than Thomson Financial estimates of 46 cents a share. Operating income for the quarter was $6.48 billion, an increase of 92% from the $3.47 billion reported for the same period last year.

Microsoft's year-over-year percentage growth is higher than normal because of a deferral of $1.64 billion in revenue and operating income, as well as 11 cents of diluted earnings per share from the second to the third quarter of fiscal 2007. That deferred revenue contributed to the higher-than-average second-quarter percentage growth.

Without those deferrals, second-quarter growth rates for revenue, operating income and earnings per share would be 15%, 27% and 32%, respectively, for the quarter reported today.

Ahead of Microsoft's announcement, analysts had expected the company to report a strong quarter, despite economic uncertainty and fears that the U.S. economy is entering a recession.

Microsoft's client business, on sales of Windows Vista, was especially strong in the quarter, with $4.34 billion in revenue compared to $2.59 billion in revenue a year ago. According to Microsoft, its client business has grown 20% on average since Windows Vista became available nearly a year ago, and the company believes Vista began hitting its stride for adoption among customers and partners in the second quarter. According to Microsoft, it has sold more than 100 million licenses for Vista.

Looking ahead to the current quarter, which ends March 31, Microsoft said it expects revenue in the range of $14.3 billion to $14.6 billion; operating income in the range of $5.6 billion to $5.7 billion; and diluted earnings per share in the range of 43 cents to 45 cents.

For the full fiscal year ending June 30, Microsoft expects revenue in the range of $59.9 billion to $60.5 billion; operating income in the range of $24.2 billion to $24.4 billion; and diluted EPS in the range of $1.85 to $1.88.

On a conference call to discuss the results, Chief Financial Officer Chris Liddell noted that 60% of Microsoft's revenue in the second quarter came from outside the U.S., and said emerging markets are becoming increasingly important to the company's revenue. In the past several years, Microsoft has made significant investments in selling its technology in developing countries such as India, Brazil and China.

Microsoft's online business revenue, which analysts are watching closely, grew 38% in the quarter to $863 million, with $154 million of that attributed to Microsoft's $6 billion purchase of digital media services firm aQuantive last year. Online advertising revenue grew 38%.

Though the online growth is encouraging for a business that has been flat for several years, financial analysts on the conference call questioned whether Microsoft is growing that part of its business fast enough to compete with Google, which shows no sign of losing its solid lead in online advertising.

Liddell defended Microsoft's online business, saying that while it's "not the size or critical mass we'd like to see," the company's investments in that segment will begin to pay off in a few years.

"We make decisions on investments now that have multi-year implications. If you look at our revenue performance over the last couple of quarters, it didn't happen by accident," it was the result of investments from several years ago, he said.

Liddell also took time to welcome Stephen Elop to Microsoft. The former Adobe and Juniper executive will join the company next month to replace longtime executive Jeff Raikes as head of Microsoft's business division. Raikes is retiring from Microsoft in September.

Liddell said Raikes had "redefined the role of business productivity software" at Microsoft. It was Raikes who helped transform Office from a fledgling desktop productivity product to a full suite for collaboration and business intelligence, and who built up Microsoft's ERP (enterprise resource planning) and CRM (customer relationship management) businesses.

In fact, Liddell noted that the Microsoft Business Division that Raikes led currently generates the most revenue at Microsoft.

Copyright © 2008 IDG Communications, Inc.

7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon