Microsoft's Net Surges 51% on Core Products

Even without the glamour of an iPad or another novel technology hit among consumers in its product lineup, Microsoft Corp. posted a 51% profit jump as two of the most venerable products in the technology business—Windows and Office—continued to thrive.

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The software giant's results suggest the standout growth of two of its biggest rivals,Google Inc. and Apple Inc., haven't yet begun to meaningfully hit Microsoft's cash cows.

Yet the earnings still leave unanswered questions about whether Microsoft can reap financial success in fast-growing markets like mobile phones, tablet computers and Internet search.

Apple, for one, recently showed how it has capitalized on businesses that it wasn't in just a few years ago, posting a 70% quarterly earnings jump partly on robust sales of iPhones and iPads. Apple earlier this year passed Microsoft to become the most valuable technology company, with a $280 billion market capitalization to Microsoft's $227 billion.

Still, Microsoft posted solid sales growth of its own over its fiscal first quarter ended Sept. 30. Revenue was $16.2 billion, up 25% from a year earlier.

In an interview, Microsoft Chief Financial Officer Peter Klein said Microsoft is thriving from a "refresh" of technology purchases by businesses of all sizes, and that the company saw "terrific growth in enterprises and small and medium businesses."

Investors appeared to like what they see, sending Microsoft's shares up 3% in after-hours trading after closing at 4 p.m. at $26.28.

Microsoft's results come after two weeks of relatively strong results from tech companies. Apart from Apple, which was driven by consumers purchasing gadgets like the iPhone, business-oriented companies such as International Business Machines Corp. also reported strong growth.

Other tech companies' earnings suggested computer demand has cooled somewhat, while remaining at high levels. Over the quarter, Microsoft's fastest growing business was Windows, which saw sales jump 66% to $4.79 billion from $2.88 billion during the same period the prior year, when it deferred $1.47 billion in sales.

The sales reflect the positive reception for Windows 7, a new version of Microsoft's flagship operating system that has been more positively reviewed than its predecessor, Vista. The company said it has sold more than 240 million licenses to Windows 7 since the product's debut a year ago, making it the fastest-selling operating system in the company's history.

Still, Microsoft hasn't participated meaningfully in the growing tablet market, now dominated by Apple's iPad. Some industry executives believe tablets are beginning to bite into sales of low-end laptops running Windows. Microsoft executives have said they expect more tablets running Windows 7 to go on sale next year.

"That has a surprisingly big overhang for something that's a relatively small part of the PC market," said Brendan Barnicle, an analyst at Pacific Crest Securities.

Another potential threat to Microsoft's Office business—Google's online suite of free applications—doesn't seem to have hurt the company yet.

In the first full quarter for sales for its new Office 2010 software, Microsoft said sales jumped 14% to $5.13 billion from $4.52 billion from a year ago for its business division, which is dominated by Office.

Mr. Klein said Microsoft has sold 20% more units of Office 2010 since the product's launch than it did of the product's previous version during the same time period. "There's no evidence of the competitive issue at all," he said.

Overall, Microsoft said income for the quarter was $5.41 billion, or 62 cents a share, up from $3.57 billion, or 40 cents a share, from the same period a year earlier.

The coming quarters will be big tests of Chief Executive Steve Ballmer's big investments in new consumer markets. The company continues to lose money in its online services division, as its operating loss in the group widened to $560 million from $477 million in the year-ago quarter.

Microsoft recently completed the transition of search advertisers from Yahoo Inc. to Microsoft's online ad system, part of a multiyear deal between the companies in which its Bing search engine has begun powering searches on Yahoo.

Microsoft next week will also begin selling Kinect, a new device that allows users of Xbox 360 game consoles to play videogames without having to hold a controller.

Another major product for the holidays, its Windows Phone 7 operating system for mobile phones, will go on sale on devices next month.