Microsoft Jumps on Big Beat, Strong Outlook

Shares of Microsoft Corp. surged more than 12% to $35.88 in extended trading Thursday, having gained 2.4% during regular hours, after the company reported FQ1 2008 earnings per share and revenue that handily exceeded analyst estimates, on strong sales of Windows Vista and Microsoft Office software. The world's biggest software company said it earned $4.29 billion ($0.45/share) on revenue of $13.76 billion; analysts polled by Reuters had been expecting EPS of $0.39 on revenue of $12.54 billion. Last year, it earned $0.35/share on revenue of $10.81 billion. "This fiscal year is off to an outstanding start with the fastest revenue growth of any first quarter since 1999," said CFO Chris Liddell. "Operating income growth of over 30% also reflects our ability to translate revenue into profits while making strategic investments for the future," (full earnings call transcript).

For FQ2 2008, Microsoft said it expects revenue of $15.6 to $16.1 billion, and EPS of $0.44 to $0.46; Street estimates had been for $15.5 billion in revenue and earnings of $0.44/share. For the full-year, the company forecast revenue of $58.8 to $59.7 billion and EPS of $1.78 to $1.81, vs. Street estimates of $57.3 billion and $1.73/share.

Windows sales were $4.14 billion in the quarter, up from $3.32 billion last year. Microsoft's Entertainment and Devices unit saw sales almost double, to $1.93 billion from $1.03 billion, on strong sales of its Xbox 360. Online services revenues jumped more than 20% to $671M from $536M, a fact Jensen portfolio manager Eric Schoenstein said, "bodes well for where they're headed."

"It was a huge beat. The guidance I think is pretty good for the year," First American Funds analyst Jane Snorek said after the numbers were released. "These are all huge numbers in every division. I'm sure the (second-quarter) guidance is cautious. I'll take it. This is going to be good for the tech sector." Morningstar analyst Toan Tran agreed: "They're firing on all cylinders."

On Wednesday, Microsoft agreed to invest $240 million in social-networking site Facebook, in exchange for which Microsoft will become its exclusive international ad broker, in addition to an existing deal under which it was brokering all the site's U.S. banner ads. In a pre-earnings note, Citigroup analyst Brent Thill told clients, "With relative share underperformance this year and valuation at 17x forward EPS vs. [the] broader software group at 23x, shares could be a port in the storm."

Sources: Press release, Wall Street Journal, Reuters
Commentary: Microsoft to Take $240M Facebook Stake, Become Exclusive Ad Platform • How Can Microsoft Stay Competitive? • Goldman Sachs: Microsoft a 'Buy'
Stocks to watch: MSFT. Competitors: GOOG, IBM, ORCL, AAPL, SAP. ETFs: IGM, PRFQ, SWH
Earnings call transcript: Microsoft F1Q08 (Qtr End 9/30/07)

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