Microsoft managed to beat the street by clamping down on costs, but its first quarter earnings still fell 18 percent from this time last year. Office and Windows licensing sales declined, and Microsoft’s Entertainment and Devices division’s revenues fell flat.

The company’s financial reports, released today, showed revenue of $12.92 billion with a net income of $3.57 billion. Its earnings per share were $0.40, which beat estimates. Earnings were reduced by the deferral of $1.47 of revenue from Windows 7 pre-sales.

Microsoft’s revenue would have fallen a more modest 4 percent from last year had Microsoft delivered Windows 7 to customers and recognized the pre-sale revenue this past quarter, according to the company. Windows 7 shipped yesterday; Microsoft’s quarter ended Sept. 30.

“We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows,” said Chris Liddell, chief financial officer at Microsoft. “We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions.”

There was a 6 percent decline in sales of Windows to OEMs, including revenue and units associated with Windows 7. Fewer customers purchased premium editions of Windows, which the company attributed to increased demand for netbook PCs. Netbook sales have been a persistent drain on Windows licensing revenues over the past several quarters.

Sales of Office 2007 fell 4 percent, due to reduced demand among business customers, and a shift to lower-priced products among consumers, according to Microsoft.

Office 2010 is due to ship in the first half of next year. It remains to be seen whether there will be a strong business case for customers to upgrade. Office 2010 focuses on delivering new online services.

Lastly, Microsoft’s Xbox 360 gaming platform offset a 14% decrease in the sale of PC hardware products, Zune devices and services, and embedded device platforms. The division is responsible for producing PC peripherals, Zunes, and Windows Mobile sales.

I’m interested to see how Windows 7 sales will compare to Windows XP’s first quarter. There is pent up demand among customers to upgrade, and many organizations bypassed Windows Vista altogether. Needless to say, Windows 7 is an extremely important product for Microsoft.

 
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