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Microsoft Cuts Outlook, Blames Economy

In its first-quarter report, the software maker said it believes continued economic weakness is likely.
Microsoft said Thursday that fiscal first-quarter revenue rose 9% year over year to a record $15.06 billion, while net income increased by a more modest 1.8% to $4.37 billion. Earnings per share, pegged by Wall Street analysts at 47 cents, actually came in at 48 cents.

"In a challenging economic environment, the first-quarter results exhibit the strength and diversity of our business model," Microsoft CFO Chris Liddell said in a statement.

The software maker, however, cut its forecast for sales and profits in the current fiscal year, which runs through June 2009.

For the full fiscal year, Microsoft predicted revenue of between $64.9 billion and $66.4 billion and EPS between $2 and $2.10. The company had previously forecast that full-year sales would fall between $67.3 billion and $68.1 billion, with EPS between $2.12 and $2.18.

Microsoft said the revised outlook reflects "the likelihood of a continued economic slowdown."

For the second quarter, ending Dec. 31, Microsoft said it expects EPS to come in at between 51 cents and 53 cents, on revenue between $17.3 billion and $17.8 billion.

"We feel extremely good about our relative competitive position and our ability to continue outgrowing IT spend. We believe our exceptionally strong cash flow, product pipeline and financial strength will allow us to weather economic conditions well," said Liddell.

Microsoft said total sales in its Client segment, which includes the Windows operating system, rose 2% year over year in the quarter. Sales via PC makers fell 1%, however, as the number of consumers who opted for nonpremium versions of its Vista operating system increased.

Sales of Windows Server products jumped 17% on the strength of strong adoption of Windows Server 2008 and SQL Server 2008, the company reported.

Microsoft's Online Services Business saw revenue increase 15% to $770 million, but the unit's operating loss widened to $480 million. Microsoft blamed the loss on increased sales, marketing, and research and development expenses.

Revenue in the company's Business Division climbed 20% because of increased sales of Microsoft Office 2007. Revenue in the Entertainment and Devices unit fell 6% as sales of Xbox 360 video-game consoles couldn't match last year's Halo 3-driven gains.

Microsoft shares jumped 3.67% to $22.32 in Thursday trading and edged higher in the after-hours markets.