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Microsoft's 11 Percent in Q1 Exceeds Expectations

Company attributes rise in earnings on strong server sales, cost-cutting.

<> Microsoft Corp., which is gearing up to release new versions of its two most important products, says it started its fiscal year on the right foot with quarterly results that exceeded expectations.

For the three months ended Sept. 30, earnings rose by 11 percent, amid higher-than-expected sales of products including server software, Redmond-based Microsoft said Thursday.

But the company also warned that its results for its current fiscal second quarter would be hurt by plans to defer about $1.5 billion in revenue to the following quarter. The company's overall results for the full 2007 fiscal year, which ends in June, aren't expected to be impacted.

Microsoft expects to defer the revenue because of a plan to offer consumers who buy computers over the next few months coupons that are good for free or discounted upgrades to the new versions of Windows and Office.

After many delays, Windows Vista is due to reach consumers in January. Microsoft and computer makers are offering the coupons in the hopes people will buy new Windows-powered computers as holiday gifts even though they will be running a soon-to-be-outdated operating system. Office 2007 also isn't due to consumers until January.

For the fiscal first quarter, Microsoft said it earned $3.48 billion or 35 cents per share, compared with earnings of $3.14 billion, or 29 cents per share, in the same period a year earlier.

The year-earlier results included a one-time legal charge of 2 cents per share.

The company said revenue for its fiscal first quarter was $10.81 billion, an 11 percent increase over $9.74 billion in the same period a year earlier.

Analysts surveyed by Thomson Financial were expecting earnings of 31 cents per share on revenue of $10.75 billion.

Microsoft Chief Financial Officer Chris Liddell said net income was boosted by higher-than-anticipated investment income. He said Microsoft also was able to reduce spending in the just-ended quarter, but he warned that some of that money will be spent in the current quarter instead, on marketing and other efforts.

Liddell said Microsoft also had higher-than-expected revenue from server software and the unit that includes the Xbox videogame console.

For the current fiscal second quarter that ends Dec. 31, Microsoft said it expects to earn between 22 cents per share and 24 cents per share. The company said the results would be about 11 cents less than they might have been because of the $1.5 billion revenue deferral plan.

Microsoft said that after deferring the $1.5 billion, revenue for its second quarter would be between $11.8 billion and $12.4 billion.

Analyst Sid Parakh with McAdams Wright Ragen said that although analysts were warned of the revenue deferral, some may not have been expecting the impact on earnings to be quite so high.

Microsoft now expects earnings of $1.43 to $1.46 per share for its full fiscal year ending in June, a small revision to a previous forecast of $1.43 to $1.47 per share.

But revenue for the 12-month period is expected to be between $50 billion and $50.9 billion, a slight increase over a previous forecast of $49.7 billion to $50.7 billion.

Liddell said the fiscal year earnings forecast was lowered in part because the company's plan to buy back about $20 billion worth of shares wasn't as successful as anticipated. Microsoft only was able to buy back about $4 billion in stock.

Analyst Alan Davis with D.A. Davidson said he was relatively pleased with overall performance.

"It's not a bad quarter, not a bad outlook," he said.

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