Microsoft said Thursday its first-quarter earnings rose 24 percent, narrowly beating expectations, but the software giant’s stock fell after disappointing guidance for the current quarter.

said Thursday its first-quarter earnings rose 24 percent, narrowly beating expectations, but the software giant’s stock fell after disappointing guidance for the current quarter.

Net income rose to $3.14 billion, or $0.29 per share, from $2.53 billion, or $0.23, in the year-ago quarter. The 2005 results included a $0.02-per-share charge for the RealNetworks settlement while 2004 results included a charge of $0.03 per share to settle a dispute with Novell.

Novell

Excluding the charges, the earnings rose to $0.31 per share from $0.26 per share in 2004. Wall Street had been expecting $0.30 per share, according to Thomson Financial’s survey of 31 brokers.

The Redmond-based company’s first quarter revenue rose 6 percent to $9.74 billion from $9.19 billion, in line with expectations. A bright spot for Microsoft came in revenue from mobile and embedded devices, which were up more than 50 percent.

But analysts were disappointed with the guidance the company issued for the current quarter. For the second quarter ending December 31, Microsoft sees earnings per share in the range of $0.32 to $0.33 on revenue in the range of $11.9 billion to $12 billion. This fell far short of analyst expectations of $0.35 per share, according to Thomson Financial.

Thomson Financial

The results came out after the market closed, but Microsoft shares fell $0.36 to $24.49 in after-hours trading.

Xbox 360 Launch

A reason for disappointing guidance could be related to sales forecasts of Microsoft’s Xbox 360 video game console, which will need to hit high targets before it can be profitable. Microsoft plans to launch Xbox in North America on November 22 and in Japan on December 12.

Japan

Increased sales of Xbox could bleed the company further, said Jamie Friedman, an analyst with Fulcrum Global Partners, a New York-based securities firm.

“Microsoft is planning on selling more Xbox units, but at this point Xbox loses money, which could be a reason for their muted guidance,” he said.

Microsoft has not impressed analysts with its revenue from home and entertainment products, which include the Xbox. The company posted first-quarter revenue from these products of $525 million, down 17 percent from the $611 million recorded last quarter.

Another area of concern for analysts is Microsoft’s struggle to monetize search. Microsoft expects revenue from its web portal MSN to be flat in the upcoming quarter and to increase no more than 2 percent in the 2006 fiscal year.

During the company’s conference call, analysts expressed surprise over this guidance, considering that Microsoft’s competitors showed significant growth. Google’s revenue was up 14 percent in the quarter while Yahoo’s rose 6 percent.

“I think it’s a fair question to ask because Microsoft is showing some competitive weakness in this segment,” said Mr. Friedman. “But then you aren’t really investing in Microsoft for the MSN part of the business.”

PC Segment Strong

The PC market, which has a larger impact on the company’s performance, grew between 15 percent and 17 percent this quarter. Microsoft revenue significantly follow the fortunes of the PC market as the firm bundles its operating systems with new computers.

Server and tools, another important market for Microsoft, posted 13 percent year-over-year revenue growth for the quarter, propelled largely by sales in the SQL Server, Exchange Server, and Windows Server products. SQL Server showed more than 15 percent revenue growth over the comparable quarter in the previous year.

Last quarter, Microsoft made several product announcements, finally unveiling the test version of Windows Vista, its upcoming Windows operating system and a preview of Office 12 (see Vista Beta Expected).

Vista Beta Expected

The company also went through a reorganization creating three broad groups comprised of platform and products services, a business division, and entertainment and devices. The reorganization sought to realign various business groups and “speed up execution,” Microsoft said.

But the move got a thumbs-down from analysts who said it failed to tackle the bureaucracy and lack of agility that has plagued the company in recent years(see Redmond Reorg Skirts Problems).

Chris Liddell, chief financial officer at Microsoft said the company will execute the $19 billion remaining under its buy-back plan twice as quickly, finishing no later than December 2006.