Microsoft posts record sales of $20 billion -- thanks Kinect!

By David Goldman, staff writer

NEW YORK (CNNMoney) -- Microsoft's booming holiday season led the company to record quarterly sales, which easily trumped Wall Street's forecasts, the software giant announced Thursday.

The Redmond, Wash., company said its fiscal second-quarter net income fell incrementally to $6.6 billion. But that still translated to an all-time earnings high of 77 cents per share, because the company has reduced its pool of outstanding shares since last year. Analysts polled by Thomson Reuters had forecasted earnings of 68 cents per share.

Sales rose 5% to $20 billion, trouncing analysts' forecasts of $19.1 billion.

"We are enthusiastic about the consumer response to our holiday lineup of products, including the launch of Kinect," Peter Klein, Microsoft's chief financial officer, said in a prepared statement.

Helping drive the strong sales was a 55% growth in revenue for the company's entertainment & devices division, which includes the Xbox 360 and Kinect devices. Microsoft said it sold 8 million Kinect controllerless Xbox attachments in two months of sales, "far exceeding" the company's expectations.

Microsoft said Kinect sold so much better than expected during the holidays that the comoany nearly sold out its entire inventory by early December. Though Microsoft didn't break out Kinect revenue, Caris & Co. analyst Sandeep Aggarwal estimated the device brought in $1.2 billion in sales during the quarter.

On a conference call with analysts, Klein called Kinect the "fastest-selling consumer device in history."

That math on that is shaky: Apple sold 16.2 million iPhones during the same quarter. Apple sells three different versions of its iPhone, but Microsoft's Kinect claim is still a statistic that should be taken with a grain of salt. Or a salt shaker.

Also included in the entertainment & devices unit's sales is Microsoft's new smartphone entry, Windows Phone 7. The company announced Wednesday that it has shipped 2 million Windows Phone 7 devices in 30 countries in the three months since the operating system launched.

Though that's nothing to sneeze at, it's a far cry from its competition: AT&T (T, Fortune 500) said Thursday that it activated 4 million iPhones in the United States alone last quarter, and Google (GOOG, Fortune 500) confirmed last week that its carrier partners are activating 300,000 Android devices each day.

"Windows Phone 7 is off to a solid start," said Bill Koefoed, Microsoft's director of investor relations. "I don't think it's great or terrible, but it's proceeding along according to plan. We'll have CDMA phones in next few months, and in the meantime it's about continuing to keep developers happy."

Most other Microsoft units also made out nicely last quarter.

Windows 7 is selling well, and the company said it is now on 20% of Internet-connected PCs. That still leaves a sizeable chunk of the PCs on the market without Microsoft's latest operating system. But that would seem to confirm the company's long-held mantra that Windows will continue to be a strong source of revenue in the future, as consumers and businesses slowly but steadily upgrade their PCs from Windows XP or Vista.

Office 2010 also outpaced expectations, with sales up 24% in the quarter.

Still, Bing continues to be a sore spot for the company. Microsoft's online services division, which includes Bing, lost $543 million in the quarter and $1.1 billion in the past six months. Despite steady share gains in search and the completion of a partnership agreement with Yahoo (YHOO, Fortune 500), Microsoft still has yet to turn a profit in that unit.

Shares of Microsoft (MSFT, Fortune 500) rose slightly after hours.

Microsoft's earnings were mysteriously made available about 15 minutes before the closing bell. The company explained that "a preproduction draft" of its earnings was discovered by some media outlets. Microsoft said it consulted with NASDAQ about the incident.

"We apologize for any confusion and will review our procedures to ensure this does not happen again," a Microsoft spokesman said. To top of page

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