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Microsoft says business demand picking up

The software giant posts solid quarterly sales and earnings, noting that Office and Windows sales are healthy amid good signs from corporate buyers.

REDMOND, Wash.--Citing a pickup in business spending, Microsoft today reported quarterly earnings and revenue that topped what many had been expecting.

For the three months ended Sept. 30, Microsoft said it earned $5.41 billion in net income, or 62 cents per share, on revenue of $16.2 billion. Sales were up 25 percent from a year earlier, although the prior year results included the effects of a deferral of revenue ahead of the release of Windows 7. Without that, sales were up 13 percent and net income rose 16 percent.

"This was an exceptional quarter combining solid enterprise growth and continue strong consumer demand for Office 2010, Windows 7 and Xbox 360," CFO Peter Klein said in a statement.

The company also said it is seeing strong sales of long-term enterprise agreements with business customers. "We are seeing improved business demand and adoption," Chief Operating Officer Kevin Turner said in a statement.

Shares of Microsoft, which rose less than 1 percent in regular trading today ahead of the earnings report, were trading after hours at $26.56, up 1 percent from the $26.28 closing price.

The company earned $4.3 billion from its Windows and Windows Live division, on revenue of $4.79 billion, as PC sales grew by an estimated 9 percent to 11 percent from a year ago.

Buoyed by the release of Office 2010, the Microsoft Business division posted $3.39 billion in earnings on sales of $5.13 billion. Overall revenue was up 14 percent, although consumer sales grew at more twice the rate of business spending.

The Server and Tools unit posted a $1.63 billion operating profit on revenue of $3.96 billion as the company saw double digit growth in both multi-year agreement and one-time sales as well as a pick-up in the mix of premium versions of Windows Server. Additionally, the company said subscriptions of its still new Windows Azure grew 40 percent quarter-over-quarter.

However, despite an increase in online advertising revenue, Microsoft continued to lose money in its online services unit, which lost $560 million in the quarter, on revenue of $527 million.

The Entertainment and Devices unit posted a $382 million operating profit on sales of $1.79 billion. Xbox console sales grew 38 percent as the company introduced a new, slimmer version of the game hardware.

Update 2:40 p.m. PT: On its conference call with analysts, Microsoft said that it has seen a shift from low-end PCs to higher-end models, but has not seen a significant impact from tablets such as Apple's iPads. "We have not seen a material shift," Klein said.

As for PC growth, Microsoft did say that growth in emerging markets was three times as strong as that of mature markets.

In addition to record sales, Klein said that the company generated $8 billion in cash flow for the first time amid a significant jump in both revenue and a strong pipeline of future bookings.

As for Office 2010, early sales have been strong, Klein said, with unit sales up 20 percent from Office 2007 in its early days.

3:00 p.m. PT: Microsoft said it expects sales of PCs and servers to businesses to continue to be strong for the rest of the fiscal year, which goes through June, but declined to predict how long the buying cycle would last beyond that.

The company also predicted revenue in the entertainment unit would grow around 30 percent in the current quarter, as compared to a year earlier, amid strong sales of Xbox and Kinect. However, Microsoft makes less of a profit on those products, so margins could take a hit.