Microsoft Beats Expectations

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Microsoft on Friday said its first-quarter sales fell significantly year-over-year, which resulted in earnings of 40 cents a share -- a decline of 17%. However, as a result of cost-cutting -- including some 5,000 projected layoffs -- the software giant managed to beat Wall Street's expectations of 32 cents a share.

Microsoft reported net income of $3.57 billion for its fiscal first quarter, which runs from July through September.

"We are very pleased with our performance this quarter, and particularly by the strong consumer demand for Windows," said Chris Liddell, chief financial officer at Microsoft. "We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions."

Still flailing sales in its Windows and Windows Live division, along with its Microsoft Business division, led to a 14% yearly decline in total quarterly revenue, to $12.92 billion.

Microsoft said its earnings reflected the deferral of $1.47 billion of revenue by pushing back $1.47 billion in revenue on computers with Windows Vista that would receive upgrades to Windows 7. Without that deferral, Microsoft said its earnings per share would have been 52 cents instead of 40 cents.

Over the past quarter, the company said its operating costs fell by 6.9% year-over-year, reflecting cuts to spending on research, sales and marketing and administrative costs.

Microsoft's troubles are being attributed to the continued global recession and resulting poor PC sales. Gartner Research this summer reported that worldwide PC shipments decreased 5% year-over-year in the second quarter of 2009.

On Thursday, Microsoft released the latest version of its operating system, Windows 7. It also recently released Microsoft Exchange Server 2010 to manufacturing, and this summer announced a strategic partnership with Yahoo to provide search results for their global properties.

What's more, just this week, Microsoft announced separate nonexclusive partnerships with both Facebook and Twitter to integrate the two services' real-time feed of status updates into the Bing search engine.

"The worldwide launches of Windows 7, Exchange Server 2010 and Windows Server 2008 R2 are exciting milestones for Microsoft, our partners and customers," said Kevin Turner, chief operating officer at Microsoft. "We are pleased by the early positive response we are receiving for these products."

However, while Windows 7 is expected to sell well, analysts questioned the speed at which consumers and businesses would update their systems. Jefferies & Company analyst Katherine Egbert, for one, said in a research note that firms are not likely to start their Windows 7 upgrades until mid-2010. According to Amazon UK, however, Windows 7 was the biggest grossing pre-order product of all time.

Overall, Xbox sales of 2.1 million units were the quarter's "biggest surprise," FBR Capital Markets analyst David Hilal said in a research note. Strong Windows sales also topped the analyst's estimate, he wrote.

Going forward, Microsoft said it was reducing its operating expense guidance to $26.2 billion to $26.5 billion, for the full year ending June 30, 2010.

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