Microsoft story updated with analyst comments

NEW YORK ( TheStreet) -- Microsoft ( MSFT) beat first-quarter earnings estimates by a wide margin Thursday afternoon, boosted by strong sales of its Windows 7 operating system, Office 2010 and Xbox 360.

Profit rose to 62 cents per share, up from 41 cents a year ago. Analysts had predicted Microsoft would post a profit of 55 cents a share.

First-quarter revenue increased 25% to $16.2 billion. Analysts had expected revenue of $15.8 billion.

Shares rose 1.83% to $26.76 in morning trading Friday.

Microsoft's strong earnings allayed concerns about weakness in the global PC market driven by softened consumer demand. Gartner recently lowered its third quarter estimates of worldwide PC shipments -- widely regarded as a sign of health in the sector -- from 12.7% to 7.6%.

While some analysts downgraded Microsoft this month on worries that tablets like the iPad would hurt business by eating away at PC sales, a "material" shift has not taken place, said Microsoft's general manager of investor relations, Bill Koefoed, during an earnings call with analysts.

Overall PC sales rose between 9% and 11% this quarter, with business PCs up about 15%, Koefoed said.

Microsoft expects strength on corporate purchases of information technology through the end of the fiscal year, Microsoft Chief Financial Officer Peter Klein said.

The corporate refresh cycle -- upgrading to Windows 7 by installing the software or getting it preloaded on new PCs -- contributed heavily to this uptick in IT spend. While the normal refresh cycle would have kicked in during the middle of the recession, companies delayed significant IT purchases until now.

The average age of a work PC is four to five years, suggesting demand for new machines will be strong, said Richard Williams, an analyst at Cross Research.

Microsoft's Windows & Windows 7 division increased revenue 10% over the same period last year, not including expenses related to the rollout of Windows 7.

Microsoft sold more than 240 million licenses for its Windows 7 operating system in its first year, becoming the fastest selling and most popular operating system in history.

Microsoft's Business Division, which includes its Office 2010 software, grew 14% over last year.

The company's Entertainment & Devices division grew 27% year-over-year to $1.8 billion, thanks to strong Xbox 360 game and console sales. Microsoft's Halo Reach the newest addition to the Halo franchise for the Xbox, hit $200 million in sales on the first day of its availability.

Microsoft's Kinect add-on for the Xbox is also expected to be " the gift this holiday season," Klein said.

Some investors expressed frustration with Microsoft's online business that includes MSN and its search engine Bing. The segment posted an operating loss of $560 million, which is 17% higher than its $474 million loss during the same period last year.

"The online business is a disaster," said Dave Stepherson, vice president at Hardesty Capital Management in Baltimore, which owns 288,000 shares of Microsoft. "Microsoft is absolutely struggling to tread water against Baidu and Google ( GOOG). The company thought online would be a growth driver, but there's nothing there."

Stepherson was also skeptical that Microsoft's mobile business could compete with the iPhone and Android. Microsoft released its Windows Phone 7 in Europe and Asia on Oct. 21, and will launch the device in the U.S. and Canada Nov. 8.

"Microsoft has been trying to get into that consumer area and they're failing at every opportunity, with the exception of the Xbox," he said. "The last really cool product they came out with was Windows 95."

--Written by Olivia Oran in New York.

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