Microsoft Beats With Kinect, Office 2010 Growth

Microsoft earnings story updated with executive comments from the conference call.

NEW YORK ( TheStreet) -- Highlighting strength in its business and entertainment divisions, Microsoft ( MSFT) posted way-better-than-expected second-quarter earnings just before the end of trading Thursday.

The software giant posted an adjusted profit of 77 cents per share on sales of $19.95 billion, up from 74 cents EPS on sales of $19 billion in the year-ago quarter. Analysts were expecting EPS of 68 cents and revenue of $19.14 billion.

The highlight of the company's conference call with analysts was talking about sales inside Microsoft's entertainment division, which saw 55% growth over the quarter. Most of that was fueled by strong holiday sales of the Kinect for Xbox 360, Xbox Live subscriptions and Xbox games.

CFO Peter Klein called Kinect the "fastest-selling consumer device in history," adding that the company is working on plans to have it "fundamentally change the way people interact with technology."

Microsoft still wouldn't say how many consumers have activated Windows Phone 7-running smartphones -- on Wednesday, the company told All Things Digital that it shipped 2 million to retailers.

"Windows Phone 7 is off to a solid start," said Bill Koefoed, Microsoft's investor relations chief, noting that the company has signed up 24,000 developers. "We're in the early days and user satisfaction is extremely high ... we're looking forward to adding more features including support for CDMA."

The company remained somewhat quiet about its tablet initiative, but in reference to the consumer PC/netbook market, it did acknowledge that it was seeing some cannibalization of "secondary devices" caused by "newer devices like tablets."

Microsoft's business division, which includes sales of its Office 2010 productivity suite, grew 24% year-over-year and saw sales of $6.03 billion, versus estimates of $5.04 billion. The company talked about the rapid growth of its recently-launched cloud version of its Dynamic CRM software, which it said is already stealing customers from market leaders like Salesforce.com ( CRM).

The company's core product -- Windows 7 -- continues to see growth and is running on more than 20% of Internet-connected PCs, the company said. "We expect the business PC refresh cycle to continue," said Klein. "We expect Windows to grow inline with the PC market for the third quarter, and for the full year."

The firm also reaffirmed its full-year guidance, forecasting $26.9 billion to $27.3 billion for the year ending June 30, 2011.

Despite the solid news, Microsoft shares were trading down 0.45% in extended trading Thursday, at $28.74.

--Written by Maggie Overfelt in New York.

>To follow the writer on Twitter, go to http://twitter.com/maggieoverfelt.

>To submit a news tip, send an email to: tips@thestreet.com.