Posting fiscal 2010 first-quarter financials before market opening this morning, Microsoft (MSFT) said it earned 40 cents a share on revenue of $12.92 billion.

And while net income per share was down 17 percent from a year earlier thanks to declining revenue in all but one of the company’s businesses, it still bested analysts’ estimates, which called for a profit of 32 cents a share.

And although sales fell for the third consecutive quarter, dropping 14 percent to $12.9 billion, they too topped forecasts of $12.4 billion.

The software giant attributed the performance to strong Windows and Xbox demand and to cost discipline.

Shares in the company spiked more than 10 percent in premarket stock trading.

(You can peruse slides of the financial results here and a liveblog of the conference call here.)

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

Here is the press release on the Q1 results (without performance tables, which you can see here):

Microsoft Reports First-Quarter Results

Windows and Xbox exceed expectations due to strong consumer demand; cost discipline drives earnings per share growth.

REDMOND, Wash.–Oct. 23, 2009–Microsoft Corp. today announced revenue of $12.92 billion for the first quarter ended Sept. 30, 2009, a 14% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $4.48 billion, $3.57 billion and $0.40 per share, which represented declines of 25%, 18% and 17%, respectively, when compared with the prior year period.

These financial results reflect the deferral of $1.47 billion of revenue, an impact of $0.12 of diluted earnings per share, relating to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before general availability. Adding back the deferred revenue, revenue totaled $14.39 billion, a 4% year-over-year decline, and EPS totaled $0.52 per share, an increase of 8% over the same period of the prior year.

“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.”

Windows 7 and Windows Server 2008 R2 launched globally on Oct. 22 as anticipated. Also during October, Microsoft released Microsoft Exchange Server 2010 to manufacturing and in July announced a strategic partnership with Yahoo! Inc. to provide search results for their global properties.

“The worldwide launches of Windows 7, Exchange Server 2010 and Windows Server 2008 R2 are exciting milestones for Microsoft, our partners and customers,” said Kevin Turner, chief operating officer at Microsoft. “We are pleased by the early positive response we are receiving for these products.”

Business Outlook

Microsoft is reducing operating expense guidance to $26.2 billion to $26.5 billion, for the full year ending June 30, 2010.

Management will discuss first-quarter results and the company’s business outlook on a conference call and webcast at 7:30 a.m. PDT (10:30 a.m. EDT) today.

Good thing Wall Street wasn’t expecting much from Microsoft. Because it didn’t get it.

After market close Thursday, the Redmond, Wash.-based tech giant reported that fiscal fourth-quarter net income fell to $3.05 billion, or 34 cents a share, from $4.3 billion, or 46 cents a share, in the same period a year earlier.

Revenue for the period ended in June fell 17 percent to $13.1 billion. Wall Street had been looking for earnings of 36 cents a share on $14.37 billion in revenue, according to data compiled by Thomson Reuters.

Online advertising revenue decreased $86 million, or 14 percent, to $529 million, primarily reflecting a decline in display advertising.

The company missed estimates by $1 billion. Gruesome.

“Our business continued to be negatively impacted by weakness in the global PC and server markets,” CFO Chris Liddell said in a statement. “In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.”

Microsoft shares are trading down more than eight percent at $23.50, as I write this.

Below is the full earnings release. BoomTown’s Kara Swisher will be liveblogging the earnings call later this afternoon.

Microsoft Reports Fourth-Quarter Results

The company delivered operational efficiency and innovation in a difficult environment

REDMOND, Wash., July 23, 2009–Microsoft Corp. today announced revenue of $13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and $0.34 per share, which represented declines of 30%, 29% and 26%, respectively, when compared with the prior year period.

“Our business continued to be negatively impacted by weakness in the global PC and server markets,” said Chris Liddell, chief financial officer at Microsoft. “In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.”

The financial results for the fourth quarter ended June 30, 2009, included the deferral of $276 million of revenue related to the Windows 7 Upgrade Option program that was announced on June 25, 2009. This revenue deferral reduced earnings per share by $0.02.

The fourth-quarter financial results also included $193 million of legal charges, $108 million of impairments to investments and $40 million of additional severance charges related to the previously announced plan. Operating expenses were reduced by $105 million of capitalized research and development expenses due to the technical milestones reached for Windows 7. Combined, these items also reduced earnings per share by $0.02.

Significant product milestones were achieved in the quarter including the releases of Windows 7 release candidate, Windows Server 2008 R2 release candidate, as well as Bing, Microsoft’s search engine designed to help people make faster, more informed decisions.

For the fiscal year ended June 30, 2009, Microsoft reported revenue of $58.44 billion, a 3% decline from the prior year. Operating income, net income and diluted earnings per share for the year were $20.36 billion, $14.57 billion and $1.62, which represented declines of 9%, 18% and 13% respectively.

“While economic conditions presented challenges this year, we maintained our focus on delivering customer satisfaction and providing solutions to our customers to save money,” said Kevin Turner, chief operating officer at Microsoft. “I am very excited by the wave of product and services innovations being delivered in this next fiscal year.”

Business Outlook

Microsoft is providing operating expense guidance of $26.6 billion to $26.9 billion, for the full year ending June 30, 2010.

Management will discuss fourth-quarter results and the company’s business outlook on a conference call and webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today.

In April, when the company reported its first-ever year-over-year decline in quarterly revenue, CFO Chris Liddell said the weakness would persist through the next quarter. This is “the most difficult economic environment the company has faced in our history,” he said. So when the company reports subpar financials later this week, it should come as no surprise.

Certainly, analysts are already steeling themselves for a poor showing. Consensus estimates from Thomson Reuters have Microsoft (MSFT) posting earnings of 36 cents per share on revenue of $14.38 billion. That’s down quite a bit from the 46 cents a share and $15.84 billion Microsoft reported during the same period last year and demonstrates just how heavily the ongoing weakness in the PC and server markets is weighing on the company.

With global PC shipments at their worst since the great dark times of 2001, there’s little reason to expect things to improve for Microsoft anytime soon.

“Yahoo doesn’t have the magic solution,” Liddell said. “No one should think it will transform the industry….Putting the two organizations together would be a useful step, but it won’t be a panacea….We have to have a plan that excludes Yahoo, we can’t be dependent on that. Even though we’ve suggested it would be great to get together, we don’t work on the basis that’s going to happen. If it does that’s great, but if it doesn’t, that’s fine too.”

Liddell’s remarks came a day after soon-to-be-former Yahoo CFO Blake Jorgensen said the company had not ruled out the idea of a search deal with Microsoft (MSFT).

“We feel extremely good about our relative competitive position and our ability to continue outgrowing IT spend,” said Microsoft CFO Chris Liddell. “We believe our exceptionally strong cash flow, product pipeline and financial strength will allow us to weather economic conditions well.”

That said, the company’s not hedging its bets. It trimmed its outlook. For the fiscal year ending June 2009, Microsoft (MSFT) predicts revenue of $64.9 billion to $66.4 billion, where it had previously forecast $66.5 billion.

Microsoft shares are on the rise following the news.

With Yahoo’s stock trading at a 52-week low of $11.37, how could Microsoft CEO Steve Ballmer fail to comment on the discrepancy between the company’s current share price and the spurned $33-a-share bid Microsoft made for Yahoo earlier this year?

Speaking at the Gartner ITXpo in Orlando, Fla., this morning, Ballmer said that a Microsoft (MSFT) acquisition of Yahoo (YHOO) or its search business would still “make sense economically” for shareholders at both companies. “We offered 33 bucks [for Yahoo] and it’s at $11 today,” Ballmer said. “It’s clear Yahoo didn’t want to sell. They probably still think it’s worth more than $33 a share. … Perhaps there will continue to remain opportunities to partner around search. We are not in any discussions with them. We’ll see. They want to remain independent. There are probably still opportunities around search. I think it would still make sense economically for their shareholders and ours.”

That remark spiked Yahoo’s shares as much as 17 percent, though there are no talks between the two companies at the moment and Microsoft CFO Chris Liddell recently described Yahoo as a “declining asset” and the chances of Microsoft acquiring it outright as “negligible.”

Said Microsoft spokesperson Frank Shaw, “Our position hasn’t changed. Microsoft has no interest in acquiring Yahoo; there are no discussions between the companies.”

And, as Microsoft (MSFT) CEO Steve Ballmer noted later on in the presentation, negotiations between the two companies were anything but speedy.
“It is a little weird,” he said. “We had an offer out that was a 100-percent premium on the operating business of the company, and there wasn’t a serious price negotiation … until three months later.” And then, to make it perfectly clear that Microsoft is no longer interested in acquiring Yahoo, Ballmer added: “We’re done, we can move on.“

Or can they? Because to that definitive statement on the Yahoo (YHOO) issue, Ballmer quickly added this caveat: “Does that mean that nobody will ever talk to anybody again? I suspect that the answer to that question is also no. It’s a long time and a big world.”

The one-cent discrepancy has played havoc with the company’s share price, knocking it down to near-Yahoo (YHOO) levels. “Clearly, we’re disappointed that our strong financial results are not reflected in our stock price,” Microsoft CFO Chris Liddell told financial analysts during the company’s earnings conference call. “The 18-percent revenue growth rate represents our fastest growth in over a decade [and] we’re confident we can continue to produce double-digit growth.”

So why is it taking the company so damn long to respond to Yahoo’s latest stonewalling of its advances? Three days have passed since the expiration of Microsoft’s deadline for Yahoo to accept its buyout offer or face a possible tender offer and proxy battle. And we’ve heard not word one from Microsoft (MSFT), which had–up until Saturday–lobbed threats at Yahoo (YHOO) nearly as often as it issues security bulletins for Windows.

Well, that may soon change. People close to Microsoft tell CNBC that the software giant is girding itself for a proxy fight. And CNBC, noting a sudden upward trend in Yahoo’s share price today, speculates that Microsoft may launch its opposition slate of directors as soon as tomorrow.

Or it may not. A source with knowledge of the situation tell BoomTown that Microsoft may make good on its threat to scrap the deal. “I would not have said this yesterday,” the source said. “But I would not be surprised if they walked away rather than waged war.”

On a post-earnings conference call this afternoon, Microsoft (MSFT) CFO Chris Liddell said Yahoo (YHOO), which insists Microsoft’s $31-per-share hostile offer “massively undervalues” it, has “unrealistic expectations” about its worth. “Our initial offer was extremely generous, more than a 100% premium for Yahoo’s core business, and our view on value is shaped by the long-term value of the company, and we intend to remain disciplined in our approach,” Liddell said. “The strongest argument that I’ve heard on why we should increase our bid–simply that we can afford to–is not one that I favor. We’ve yet to see tangible evidence that our bid substantially undervalues the company. In fact, we see the opposite. Yahoo continues to lose search share, and profitablity continues to decline year-on-year.”

It sure does. Yahoo’s operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. But then, Microsoft doesn’t want Yahoo for its profits; it wants it to make its own advertising platform more successful. Is that worth more than $31-per-share? Liddell clearly doesn’t seem to think so. “Unless we make progress with Yahoo toward an agreement by this weekend, we will reconsider our alternatives,” he said. “We will provide updates as appropriate next week. These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities, both organic and inorganic.”