By Martin Wolk Executive business editor
msnbc.com
updated 1/27/2005 6:59:40 PM ET 2005-01-27T23:59:40

Software giant Microsoft reported quarterly profits and sales that easily exceeded expectations Thursday, crediting stronger-than-expected sales of personal computers to both businesses and consumers. Company executives raised projections slightly for the next six months, saying a sustained global economic rebound should continue to fuel strong growth in computer sales.

Microsoft posted net income of $3.46 billion or 32 cents a share for its fiscal second quarter ending Dec. 31. That was more than double the total of a year earlier, when profits were hurt by costs associated with switching from employee stock options to stock grants.

Revenue was up 7 percent over the year-ago level to $10.82 billion.

(MSNBC is a joint venture of Microsoft and NBC.)

After adding back the cost of stock-based compensation, Microsoft's earnings beat the average estimate of Wall Street analysts by 3 cents a share, according to Thomson Financial. Microsoft shares rose slightly in extended-hours trading after the financial results were announced. Microsoft was quoted at $26.40 on the Inet electronic brokerage system, up from its earlier Nasdaq close of $26.11.

“Our record revenue came from across-the-board strength in both our business and consumer segments” outgoing chief financial officer John Connors said in a statement. Connors recently  announced plans to retire and join a venture capital firm after 16 years with the company.

Microsoft said the company's home and entertainment division, which includes games and the Xbox video game console system, posted its first profitable quarter on sales of its hit game Halo 2. But the company said the division probably would be back in the red for the rest of the fiscal year and would not achieve sustained profitability until sometime in fiscal 2007.

Still, Connors was upbeat about the remainder of the fiscal year, saying PC unit sales had grown at a 12 percent rate in the latest quarter rather than the 7-9 percent projected. He said PC sales growth was likely to continue at a double-digit rate for the rest of this year.

He said Microsoft now expects revenue of $39.8 billion to $40 billion for the current fiscal year, which ends June 30, up about $800 million from previous projections.

PC sales are crucial to Microsoft fortunes because the vast majority of the company's operating income comes from the two divisions that include Windows and Office, the ubiquitous operating system and productivity software that often come preinstalled on new computers or are sold to businesses through licensing arrangements.

The quarter included the launch of the hit game Halo 2, which sold 6.3 million copies, or nearly one for every three Xbox consoles that have been sold to date, Microsoft said. At its suggested retail price of about $50, the game has generated about $300 million in retail sales, equivalent to the biggest Hollywood blockbuster movies.

Microsoft said earnings and revenues are likely to be slightly lower for the current quarter, which is typically slower than the just-ended holiday period.

Separately, Microsoft said executives will meet with Justice Department officials next month to review whether the next version of its Windows operating system complies with the company’s 2002 antitrust settlement with the government.

Microsoft currently plans to release the Windows upgrade in 2006, with a wide beta test to begin this year.

Antitrust regulators will be looking to see if Longhorn will offer choices for competing programs that run on top of Windows, such as alternatives to Microsoft’s Internet Explorer Web browser and software for playing audio and video files.

The lawsuit against Microsoft was sparked by charges that the company used its monopoly power to unfairly promote its own software at the expense of competitors.

Microsoft's earnings statement included one notable change on the balance sheet. The company reported it had cash and short-term investments of $34.5 billion on hand as of Dec. 31. That was down from more than $64 billion three months earlier after the company handed out a record one-time cash dividend of $3 a share or $32.6 billion.

Reuters contributed to this report.

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