Lack of Vista not felt on Gates' bottom-line

With holiday PC sales apparently unscathed by the lack of Windows Vista, Microsoft reported quarterly profits that topped expectations and its own forecast.

The software giant said it earned $2.63bn, or 26 cents per share, on revenue of $12.54bn for the three months ended 31 December, its second fiscal quarter. That compares with profits of $3.65bn, or 34 cents per share, on revenue of $11.83bn for the same quarter a year ago.

Microsoft said in October to expect per-share profits of 22 cents to 24 cents on revenue of $11.8bn to $12.4bn. Analysts had been looking for profits of 23 cents per share on revenue of $12.08bn, according to First Call.

Microsoft CFO Chris Liddell said in a statement: "Results this quarter exceeded our expectations across the board, with revenue growth at or above our high-end guidance for all divisions. Healthy PC and server markets, as well as broad-based business and consumer demand for Microsoft offerings, fuelled revenue growth this quarter."

In addition, Microsoft said it took in, but deferred, $1.64bn of revenue to account for an upgrade programme that allowed those who bought Office or a new Windows PC during the holidays to get a free upgrade to the new products - Office 2007 and Windows Vista. The company had projected about $1.5bn in deferred revenue. The company said the deferred revenue translates to about $1.13bn worth of profits, or 11 cents per share.

For the current quarter, Microsoft is expecting revenue to be in the range of $13.7bn to $14.0bn, with per share profits of around 45 cents or 46 cents, with both figures accounting for the impact of the deferred revenue. Analysts were expecting 46 cents per share in profits on revenue of $13.98bn, according to First Call.

Microsoft is seeing slightly higher profits projections and about the same revenue estimate as it previously expected for the fiscal year. The company now expects full-year revenue in the range of $50.2bn to $50.7bn, with per-share profits of $1.45 to $1.47. In October, the company had pegged full-year revenue in the range of $50bn to $50.9bn and per-share profits in the range of $1.43 to $1.46.

However, Microsoft is changing its expectations of where that revenue will come from, saying more revenue is now projected to come from its core Windows, Office and server software businesses, while its Xbox and internet services businesses are now seen producing less revenue.

Colleen Healy, general manager of investor relations, said PC sales in the holiday quarter were a little higher than expected but Microsoft is not changing its forecast for the remainder of its fiscal year.

As for Microsoft's overall drop in revenue compared with a year ago, Healy noted the company would have posted 20 per cent growth if one includes the sales that were deferred to this quarter. "Twenty per cent growth is good growth for any company, let alone a company our size," she said.

Ina Fried writes for CNET News.com