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Microsoft's bottom line gets a Windows 7 boost

The software maker says that "exceptional demand" for the new operating system helped earnings top estimates and quarterly sales hit record levels.

With a boost from the release of Windows 7, Microsoft on Thursday said that its quarterly revenue topped $19 billion as the company sold a record number of copies of its operating system.

The software maker said it earned $6.66 billion, or 74 cents per share, on revenue of $19.02 billion for the three-month period that ended December 31. Those results included revenue deferred from the prior quarter, as the company was preparing for Windows 7 and offering free upgrades to those who bought Windows Vista-based computers. Excluding the deferred revenue, Microsoft said it had revenue of $17.31 billion, and diluted earnings per share would have totaled 60 cents per share.

"Exceptional demand for Windows 7 led to the positive top-line growth for the company," chief financial officer Peter Klein said in a statement. "Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth."

Chief Operating Officer Kevin Turner touted the record quarter for Windows unit sales, spurred by the Oct. 22 launch of Windows 7. "We are thrilled by the consumer reception to Windows 7 and by business enthusiasm to adopt Windows 7," he said in a statement.

The company said that through the end of December it had sold more than 60 million Windows 7 licenses, which it said made Windows 7 the fastest selling operating system in history.

In October, Microsoft reported better-than-expected sales, also boosted by stronger demand for Windows.

The company said overall PC sales grew 15 percent to 17 percent in the quarter, although that was led by a 20 percent growth in consumer sales as the business market remained roughly flat. The market for new servers remained weak, down slightly year over year, although Microsoft's server and tools business unit managed to grow revenue 2 percent as compared with a year ago.

Microsoft's online unit saw its revenue dip 5 percent, led by a 2 percent drop in online advertising, although the company noted that its Bing search engine continues to gain market share.

The Microsoft Business Division, which includes Office, saw sales off 3 percent, perhaps as customers await this year's launch of Office 2010.

On the Xbox side, Microsoft said it sold 5.2 million consoles during the quarter, down 13 percent from a year ago, leading the entertainment and devices unit to post a double-digit decline in revenue.

The company didn't give a full forecast for the coming quarter, saying it would have more to say on a 2:30 p.m. PST conference call. It did tell analysts to expect operating expenses for the full fiscal year ending June 30 to total $26.2 billion to $26.5 billion.

Here's a chart of how each of Microsoft's individual business units performed:

Update 2:40 p.m. PT: On its conference call, Microsoft executives said that essentially all of the company's growth came from the consumer side of its business. Business spending stabilized some in the quarter, but is not yet seeing growth, Microsoft said.

Netbooks were about 11 percent of the market, roughly flat with both the prior quarter and a year ago. Microsoft said that 90 percent of those devices were running Windows, with Windows 7 accounting for "well over half of that."

2:45 p.m. PT: Microsoft executives "continue to be hopeful" that the company's Yahoo search deal will be approved by regulators early this year. The software maker said that it cut 800 jobs during the quarter and that its staff levels are down 8 percent from a year ago.

2:50 p.m. PT: Looking forward, Microsoft said that it sees some reasons to be optimistic.

"Heading into 2010, we are encouraged by the possibility of improving market conditions," Klein said, as well as by new products like Project Natal and Office 2010.

The company also says it expects some improvements over the next two quarters in server shipments, which have been declining for several quarters. The company said it also sees a pick-up in online ads. "The outlook for online advertising appears to be improving," Klein said.