Microsoft profit surges on Windows 7 momentum

NEW YORK (CNNMoney.com) -- Microsoft posted a quarterly profit Thursday that surged from a year earlier and topped Wall Street's forecasts, thanks to momentum from Windows 7, the operating system released in October.

Microsoft's net income rose 35% from a year earlier to $4 billion, or 45 cents per share, in the three months ended March 31. Analysts polled by Thomson Reuters were expecting earnings of 42 cents per share.

Sales increased 6% to a $14.5 billion, rising for the second consecutive period after three quarters of decline. The results included the deferral of $305 million of revenue related to a promotional program for Microsoft Office 2010, which is due out in June. Analysts were expecting sales of $14.4 billion.

"Windows 7 continues to be a growth engine, but we also saw strong growth in other areas like Bing search, Xbox Live and our emerging clouds services," Peter Klein, Microsoft's chief financial officer, said in a prepared statement.

Sales in the operating system division, which includes Windows 7, rose 28% during the quarter and profit increased by 34%. More than 10% of the world's PCs now run Windows 7, Microsoft said.

Consumer spending drove most of Microsoft's growth during the quarter. But during a conference call with investors, Klein said corporate technology spending is also beginning to return.

"The business PC refresh has started," Klein said. Windows 7 licenses for businesses rose 15% during the quarter, he said.

With most of corporate PC upgrade cycle still ahead, Windows 7 should continue to pay off for Microsoft, according to Canaccord Adams analyst Peter Misek.

Revenue from Microsoft's online services business division, which includes MSN and its search engine Bing, rose almost 12%, and its profit soared more than 73%. The company's search deal with Yahoo (YHOO, Fortune 500), which aims to challenge Google's (GOOG, Fortune 500) dominance in online search, launched during the quarter. Misek expects that to push earnings higher in upcoming quarters.

Under the 10-year agreement, both search engines maintain their own branding but Yahoo is responsible for acquiring premium advertisers. In turn, Microsoft pays Yahoo 88% of the revenue it gets from searches on Yahoo's sites.

Sales from the Redmond, Wash.-based company's entertainment devices segment, which includes the Xbox and Zune HD, rose 2%. After losing $41 million in the same period last year, the division this time posted a $165 million profit.

Revenue and profit from the company's server unit both rose more than 2%.

Sales in Microsoft's business division, which include Office products, fell 6%, and the unit's profit dipped 5%. But the division will see a boost following the release of Office 2010 in June, Klein said.

Shares of Microsoft (MSFT, Fortune 500) dipped 3% in after-hours trading, afterrising 0.2% in regular hours.