Microsoft's 'Halo' effect

NEW YORK (CNNMoney.com) -- Microsoft Corp. reported quarterly earnings Thursday that beat analysts estimates, citing robust demand for its Vista operating system as well as its top-selling new video game "Halo 3."

Shares of the company were up nearly 10 percent in after-hours trading.

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The world's largest software maker reported a fiscal first-quarter net profit of $4.29 billion, or 45 cents per share, up 23 percent from the same quarter last year. Analysts were expecting the company to report earnings of 39 cents per share, according to estimates from Thomson Financial.

Revenue rose 27 percent in the quarter, to $13.76 billion, well ahead of analysts' expectations of $12.57 billion.

"Some of the investments they made in the last ten years are starting to pay off," said analyst Robert Toomey of E.K. Riley Investments after the company reported results.

There has been some skepticism about Microsoft's potential as a growth stock over the years, Toomey said. But the strong report will "squelch some of the nay-sayers out there" he said.

To that end, based on where Microsoft's stock was trading after hours, it looks poised to open at a five year high Friday morning.

Microsoft also offered guidance for its second quarter, which ends in December, as well for the full fiscal year ending in June, that was substantially above Wall Street's forecasts.

The company said it expects sales for the second quarter to be in the range of $15.6 billion to $16.1 billion, compared to a consensus estimate of $15.64 billion. Microsoft said earnings per share should be between 44 cents and 46 cents. Analysts had been expecting a profit of 44 cents per share.

For the full year, Microsoft raised its sales guidance to $58.8 billion to $59.7 billion, compared with analysts' estimates of $57.4 billion, and said that it should earn between $1.78 per share and $1.181 per share. Wall Street's consensus estimate before Microsoft's first-quarter report was for an annual profit of $1.73 per share.

"This fiscal year is off to an outstanding start with the fastest revenue growth of any first quarter since 1999," said Microsoft's chief financial officer Chris Liddell in a statement.

Kevin Johnson, president of the platform and services division at Microsoft, added in the statement that "customer demand for Windows Vista this quarter continued to build."

Revenues in Microsoft's client division, which includes Vista, increased 25 percent in the quarter.

But the strongest part of Microsoft's business was its entertainment and devices division, which includes video games like "Halo 3," the Xbox video game console and the Zune digital music player. In its report, the company said that the release of "Halo 3" was "the biggest entertainment launch day in history."

Sales in the entertainment and devices division surged more than 90 percent from a year ago and the unit posted an operating profit of $165 million, compared to a loss of $142 million in the same period a year ago. Sales of the Xbox game console reached 1.8 million units in the quarter.

The strong earnings report comes one day after Redmond, Wash.-based Microsoft (Charts, Fortune 500) announced that it bought a $240 million equity stake in the popular social networking site Facebook. The purchase came after an intense bidding war with rivals Google Inc (Charts, Fortune 500). and Yahoo! Inc (Charts, Fortune 500).

Cowen and Co. analyst Walter Pritchard wrote in a note released Thursday said that the Facebook purchase will keep Microsoft's online services business "relevant."

Though he thought the 1.6 percent equity came at a steep price, Pritchard argues that the investment in Facebook has "strategic importance" that justifies what Microsoft paid.

In a conference call to analysts, Microsoft's CFO Chris Liddell, talked about the company's efforts to invest in its online services business, "we are pleased with the progress we're making at putting building blocks in place, " he said.

In an oblique reference to the Facebook deal, Liddell said he is happy about, "a partner we think has tremendous growth opportunities."