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The Globe and Mail

Microsoft profit beats expectations on stronger computer sales

The interior of a Microsoft retail store is shown in San Diego, Jan. 18, 2012.

Mike Blake/Reuters/Mike Blake/Reuters

Microsoft Corp. beat Wall Street's profit forecast as personal computer sales held up better than expected, lifting its shares 2.5 per cent after hours.

The results buoyed optimism around the world's largest software maker, which is lining up a new tablet-friendly version of Windows for release later this year and is looking to make a dent in Apple Inc. and Google Inc.'s domination of the mobile market this holiday shopping season.

"The results were a fair amount better than we were looking for," said Rick Sherlund, an analyst at Nomura Securities. "Overall revenue growth was 6 per cent, and this is before the new product cycle, which should come around October."

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Microsoft – whose shares hit a 4-year high of $32.95 (U.S.) last month – has not said when its Windows 8 system will be released, but most in the industry expect it on devices from around October, offering an alternative to Apple's runaway iPad. New Windows smartphone software is expected around the same time.

"Next year at this time we should be talking about Windows 8 mobile and how it's contributing or not to the company," said Kim Forrest, analyst at Fort Pitt Capital Group. "But we really need Windows 8 to come out on all devices, to see if it's going to have that synergy or not."

The Redmond, Wash.-based company reported fiscal third-quarter profit of $5.11-billion, or 60 cents per share, compared with $5.23-billion, or 61 cents per share, in the year-ago quarter when it posted a one-time tax gain.

Profit beat analysts' average forecast of 57 cents per share, according to Thomson Reuters I/B/E/S.

Sales rose 6 per cent to $17.41-billion, driven by strong demand for its server software products and Office application. Analysts had expected sales of $17.18-billion.

Worldwide personal computer sales rose a modest 1.9 per cent in the quarter, according to tech research firm Gartner Inc. That was better than expected in a market facing hard-drive shortages from Thailand and the onslaught of Apple's iPad.

That helped Microsoft, which supplies the operating system for 90 per cent of PCs, to post a 4-per-cent increase in sales of Windows, still its main product.

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"The Windows beat was a positive surprise, looking at about 4-per-cent growth, versus expectations for about a 4-per-cent decline," said Josh Olson, an analyst at Edward Jones.

"We also had solid business and server performance as well. The Big Three, if you will, in terms of the revenue drivers, were all a little bit better than expected, with Windows a lot better than expected."

On the downside, Microsoft's usually profitable entertainment and devices unit posted a quarterly loss due to falling sales of its aging Xbox console and increased research and marketing costs for its new Windows smartphone software.

"There was weakness in entertainment and devices," said Sid Parakh, an analyst at McAdams Wright Ragen. "If that were to have come in in-line, it would have been a pretty nice beat."

Traditional console sales are down across the board this year – hurting Microsoft, Sony Corp. and Nintendo Co. Ltd. – as Apple's iPad and other tablets grab a slice of the lucrative market.

Microsoft shares closed at $31.01 on Nasdaq.

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The stock is up 20 per cent so far this year, outpacing the tech-heavy Nasdaq's 16-per-cent gain, and a 10-per-cent rise in the Standard & Poor's 500.

But it is still below levels of 10 years ago, as investors worry about the company's ability to match Apple and Google in online and mobile technology. Apple's market value is now comfortably twice that of Microsoft, and its iPhone sales last quarter exceeded Microsoft's overall revenue.

Microsoft is the cheapest of the big tech stocks, with a price hovering around 10.7 times expected earnings for the next 12 months, or about 14-per-cent lower than its peers, according to StarMine.

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