Microsoft PostsStrong ProfitsAs Tech Thrives

Microsoft Corp.'s best quarterly revenue growth in eight years, helped by a surge in sales for the Windows operating system, capped a strong earnings season for the technology industry that has made it a rare bright spot for investors this fall.
Microsoft's 23% boost in net income, reported after the 4 p.m. close of markets, lifted its shares more than 10% in after-hours trading, making America's third-largest company by market value some $30 billion more valuable. Its surprisingly strong earnings, after years of lackluster growth that some investors took as a sign of a plateau, showed that Microsoft has maintained its dominant position in technology even as hot Internet companies garner much of the public's attention.
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The personal computer continues to expand its role as a workhorse in businesses and staple in the home. Microsoft's performance was driven largely by sales of the same two products that were key performers back in 1999 when it enjoyed its last growth surge: the Office software package and Windows, the foundation for most of the world's PCs.
The Redmond, Wash., company's results follow strong earnings last week from chip makers Intel Corp. and Advanced Micro Devices Inc. Those companies pointed to demand for laptop computers and growth in emerging markets such as China and India. Earlier this week, Apple Inc. posted a 67% jump in profit and a 29% increase in revenues amid rising sales of its Mac computers.
Overall, the PC industry, sometimes perceived as a mature business, grew more than 14% in the third quarter, according to research firms Gartner and IDC.
"Consumers are driving an enormous amount of growth, especially as they move to portables and higher-end desktops," says Todd Bradley, an executive vice president at Hewlett-Packard Co. in charge of the PC business. He said India and China are fueling H-P's sales as consumers and small businesses in those countries join the computer age. PC shipments in Asia increased 23.4% in the third quarter, according to Gartner.
Microsoft's revenue rose 27% from a year earlier to $13.76 billion for the quarter ended Sept. 30. Net profit rose to $4.29 billion, or 45 cents a share, from $3.48 billion, or 35 cents a share, a year ago.
Microsoft's shares rose more than 10% in after-hours trading. During regular trading yesterday on the Nasdaq Stock Market, Microsoft shares rose 74 cents to $31.99 at 4 p.m., giving it a market capitalization of $300 billion.
The company still faces a struggle against Google Inc. and other Internet stars that are reaping the biggest benefits from growth in online advertising. Microsoft's search engine remains far behind Google's in popularity.
Microsoft's online-services group posted an operating loss of $264 million in the third quarter, wider than the $102 million loss in the same period a year ago, though revenue jumped 25% in the quarter to $671 million. The loss comes in large part from investments in banks of computers, called data centers, that run Microsoft's online services.
In an effort to boost its presence in online advertising, Microsoft agreed Wednesday to invest $240 million for a 1.6% stake in the social-networking site Facebook Inc., valuing the closely held startup at $15 billion.
An even bigger long-term threat for Microsoft is the emergence of Internet services that match PC software such as the Office package, which includes programs such as Microsoft Word, PowerPoint and Excel for spreadsheets. Google and others are experimenting with ways to offer such functions free of charge, with the revenue coming from online advertising. Over time, some users might find less need to buy from Microsoft.
For now, demand is strong for Office and Windows, including Windows Vista, introduced last year, and its predecessor, Windows XP. Quarterly sales at the Windows division jumped 27% to $3.37 billion. Revenue and profit also grew at a double-digit pace in the division that sells Office.
Vista has generally underwhelmed reviewers, but many consumers end up with it when they buy new PCs that come with Vista by default. Microsoft executives said they were surprised that a majority of Windows sales came from pricier versions of XP and Vista that include features such as better photo-editing software.
The real test of Vista will come over the next year as more large businesses face the choice of whether to roll out the software broadly. Many corporate buyers remain skeptical that benefits of Vista will outweigh the costs and challenges of switching to it.
Companies like Webcor Builders, a San Mateo, Calif., commercial builder with around 700 employees, are helping to boost Microsoft and the PC makers. Gregg Davis, chief information officer of Webcor, says his company is upgrading its PCs with laptops that include new Microsoft software such as Office 2007. Webcor plans to roll out 200 new laptops in the next two months, and will complete the deployment by mid-2008.
"We're always upgrading," says Mr. Davis.
Microsoft said the revenue growth in the third quarter was its fastest since 1999, when the dot-com boom was in full swing. The growth is even more significant because Microsoft today has two and a half times the revenue it did eight years ago. "To be able to grow as fast as we did eight years ago...is a pretty momentous achievement," said Microsoft's chief financial officer, Chris Liddell, in an interview.
Microsoft's revenues got a boost from the weak dollar, which raises the value of sales overseas when converted into dollars.
One noteworthy contributor in the quarter was the Xbox 360 videogame console and the Halo 3 videogame, which together nearly doubled revenue in Microsoft's entertainment division to $1.9 billion for the quarter. The group moved into the black, posting a profit of $165 million compared with a loss in the same period of the previous year of $142 million.
Despite the strong run of tech earnings, the industry by itself can't hold up the U.S. economy, which some believe is headed for a downturn triggered by the housing slump. Business and government spending on technology accounts for just 4% to 5% of annual output in the U.S., according to Forrester Research. "Tech is a bright spot in the economy, with emphasis on the word spot," says Andy Bartels, a Forrester analyst.
But tech makes up a much bigger portion of the stock market -- some 16.6%, according to Standard & Poor's. The strong earnings at Apple, Intel and others have helped keep stock indexes near record highs even as financial institutions take big hits connected to mortgages gone bad.
--Don Clark and Pui-Wing Tam contributed to this article

From WSJ on-line