Microsoft lifts guidance as sales surge

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Microsoft prepared the ground for next week’s launch of Windows Vista, its first new PC operating system in five years, with news Thursday of unexpectedly robust sales across the board from its PC, server and games console businesses in the final quarter of last year.

Wall Street celebrated the news with a continuation of the stock price rally that has now added nearly $100bn to the software company’s market value since the middle of last year. At that time, Microsoft was beset by concerns of spiralling costs as it battled on a number of fronts against Google, Sony and Apple to break into new internet and consumer markets.

In a sign of confidence in the earnings power of its core PC business, Microsoft also Thursday raised its earnings guidance for the rest of this year. The increase came at the same time that it issued a more cautious forecast for the growth of its entertainment devices division, which is centred on the Xbox 360 games console.

During the latest quarter Microsoft said its after-tax earnings had fallen 28 per cent, to $2.6bn, or 26 cents a share, while revenues had edged up 6 per cent, to $12.5bn. The decline in profits reflected the company’s decision to combat a pre-Vista slump in sales by issuing vouchers to buyers of new PCs that let them upgrade to the new operating system, as well as the new version of the Office suite of productivity applications, to be launched next week. Microsoft said $1.64bn of revenues had been deferred until next quarter as a result, or $100m more than expected, reflecting stronger demand from PCs than expected during the quarter.

In other signs of broad demand for its products, Microsoft said that sales of the Xbox 360 and games linked to it contributed to a 75 per cent surge in revenues in the entertainment and devices division in the latest quarter, to $2.96bn, while server software continued its strong run with 17 per cent growth to $2.85bn. Meanwhile, the declines in revenues from the client and business divisions, which are tied to Windows and Office, were less pronounced than expected.

Microsoft said it had deferred some costs, such as higher marketing spending and a planned increase in staffing, until the second half of its current financial year, which ends in June. That contributed to stronger than expected earnings in the latest quarter, which came in 5 cents a share higher than most Wall Street estimates.

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