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.

In remarks at Microsoft’s Worldwide Partner Conference today, COO Kevin Turner said Microsoft has settled on a location for the retail stores it announced earlier this year: Within spitting distance of Apple stores. “We will have some retail stores that are opened up right next door to Apple stores this fall,” he said.

There goes the neighborhood, right? Anyway…

So Microsoft is going to play McDonald’s (MCD) to Apple’s Burger King (BKC). Makes sense. Apple’s retail locations are very well chosen. Microsoft, if it’s going to go this route, would be wise to have stores there as well. As economic theorists Charles ReVelle and Harold Hotelling once observed, “The best position for a new vendor is back-to-back with the well-positioned first vendor, allowing an even split of the market. Any other position of the new vendor would have given that new entrant a smaller market share.”

And one could argue that Redmond might benefit from a retail presence that brings all its wares together in a single “shopping experience”–Windows, Xbox, Zune. All that partner hardware. Surface. Put a Project Natal booth at the back of the store to draw foot traffic and who knows what might happen?

A remarkable metric, given the economic downturn. How is it that gaming is thriving at a time when the global financial crisis is squeezing wallets? “There are a couple of reasons,” Ron Meiners, director of community for the Hollywood Interactive Group, recently told News.com. “One is the traditional value of entertainment during tough economic times. Like the great fantastic musicals in the 30s. Movies did great, because they took people’s mind off of the troubles they were facing. [And] videogames have great value as entertainment. The number of hours of solid entertainment that comes from a videogame purchase is much greater than a movie, for example, for very comparable cost.”

Since John Paczkowski is still out of range, Beth Callaghan will post Digital Daily today.

Reuters/Hollywood Reporter reports that Microsoft execs have been talking to talent agencies all over Hollywood with the intention of building an exclusive body of original content for the company’s Zune player. Not just standard sitcom fare, either–Zune’s recent update of firmware for the device provides better social functionality, and Microsoft (MSFT) sees this as a move toward the kind of communal functionality pioneered by the XBox multiplayer experience.

Richard Winn, director of entertainment development for Zune, says, “What we would be looking to do with any form of original content is the added component that Zune could provide that iTunes or any competing service couldn’t.”

Great, but will that make a difference, with the Zune market share hovering at 4 percent (compared to Apple at 71 percent)? Probably not. This is the same programming/marketing team, after all, that came up with the idea of launching a Joy Division version of the Zune. Really–Zune users are already lonely; no need to make them sad.

Well, it’s also the team that does the impossible–defying all rumors of extinction and plugging away on a platform no one uses. Maybe while the Zune team is making the rounds, they’ll find out who represents U2.

Huh. So perhaps “The Dark Knight” will turn out to be the iPhone 3G of movies.

We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well. I like to call this idea creative capitalism.”

–Microsoft Chairman Bill Gates, Jan. 24 2008

Just a few hours after Microsoft Chairman Bill Gates called for a “creative capitalism,” the company he founded proved that old-school capitalism is alive and well.

Microsoft reported an impressive second quarter, blowing the doors off Wall Street expectations and offering some optimistic guidance for 2008. Net income rose 79% from a year ago, and
quarterly revenue jumped 30% amid a surge in sales of the Windows OS and the Xbox 360. A strong showing made stronger still by third quarter and full-year forecasts that exceed even the most optimistic projections.

7:40 p.m. A few more moments of guitar wankery from Slash and … well, I guess that’s it. Bach, not Gates, ends the keynote. “I’ll see you again next year,” he says as Gates waves briefly and leaves the stage. Must be rushing off to that billion-dollar-a-hand poker game at Caesars … And the lights go up. That is it. Quite a disappointment. Take away the celebrity appearances and what’s left is a well-rehearsed series of anticlimaxes and rehashes of demos past. A pity, really.
7:38 p.m.: Gates: She’s pretty good. But I’ve got my own ringer here … (Pleeeeease let it be Wayne Newton)
Nope. It’s Carrot Top. Kidding … It’s Slash it’s from Guns n’ Roses playing “Welcome to the Jungle” for real. He doesn’t miss a note either. Dry ice smoke and flashing lights.
7:36 p.m.: Bach challenges Gates to a Guitar Hero 3 match. Bach invites Guitar Hero champion Kelly Clarkson to play against Gates. … She plays Guns n’ Roses’ “Welcome to the Jungle” and doesn’t miss a note.
7:35 p.m.: Gates using the device to navigate video archives of keynotes past. Microsoft’s version of iTunes’ ‘Cover Flow.’ Messy.
7:33 p.m.: Gates uses the device to scan a photo of the Vegas skyline behind him. Clicks on the Venetian. The screen displays information for his keynote address. Pops another note indicating Ballmer’s playing nickel slots at another casino. Laughter.
7:31 p.m.: Bach brings Gates back onstage to discuss the future. … Gates takes the stage again with a handheld video recognition device. He points it at Bach and clicks. It recognizes Bach, displays his name onscreen, along with a note saying he owes Gates money.
7:29 p.m.: Fellow presenter uses Tellme to search out a movie theater, browse movie listings, purchase tickets for a movie and then send them to a friend. Pretty slick, especially given the size of the mobile advertising market.
7:27 p.m.: On to Windows Mobile and Microsoft’s Tellme service.
7:26 p.m.: Bach and fellow presenter now demoing “Sync”–an in-car voice-command technology that enables Zune owners to sync their Zunes to their car stereos and then navigate their music libraries with voice commands.
7:24 p.m.: Bach talks about Zune Social as a service that drives music transactions from discovery to purchase. Find a song you like on a friend’s page, click on it and purchase from Zune Marketplace. Again, haven’t we heard all this before?
7:22 p.m.: Listening habits are tracked via “cards.” Bands can create their own Zune Social pages as well. Essentially, MySpace for music.
7:20 p.m.: Zune Social apparently tracks your listening habits in real-time. It’s all about “people-powered music discovery.”
7:18 p.m.: Bach talking up the Zune now. … Demoing Zune Social.
7:17 p.m.: British Telecom is to begin selling Xbox 360s as Media-Room based set-top boxes. Price of relocation to UK not included with activation fee …
7:15 p.m.: In addition to this, MGM will also be adding its film library to Xbox Live. End result: Twice as many hours of on-demand programming as any cable provider out there.
7:14 p.m.: ABC and Disney will be bringing their programming to Xbox Live.
7:13 p.m.: Gates brings Robbie Bach onstage to talk about Xbox 360.
7:11 p.m.: Using Microsoft Silverlight technology, NBC and MSN will put some 3,000 hours of high-definition footage of the Beijing Olympics online. Wow: 3,000 hours of video. What a massive effort. First of its kind.
7:10 p.m.: Gates commenting on broadcast television: “It simply isn’t as fulfilling an experience as online video.”
Here comes another video segment. … Bob Costas pitching.
7:09 p.m.: Moving on to Silverlight. Gates says NBC has chosen Microsoft as its exclusive online video partner for the 2008 Olympics.
7:08 p.m.: He finishes up the design, lays his phone down on the screen and it automatically emails his design to friends for review.
7:07 p.m.: Gates, thankfully, back onstage for another demo. Wait, what’s this. Another Surface demo?! Didn’t we see this last year? Yes, we did–but given by Steve Ballmer, not Gates. Gates using Microsoft’s Surface multitouch computer to demo a snowboard-design service.
7:05 p.m.: The big achievement being touted here seems to be the connection between these services and the single log-on. As Dan Aykroyd might say: Isn’t that AMAZING?
7:04 p.m.: Windows Live Photo Gallery … in browser photo editing, sharing (via email or Flickr) and exporting to blog. Bor-ing. They would have been better off playing the farewell video again. That ‘Bib Pimpin’ segment was comedy gold.
7:02 p.m.: First up: Windows Live Calendar now with … wait for it … multiple calendar overlays (YAY! sigh…)
But wait, there’s more … Windows Live Events, an invitation/event organizing service. They really should have called it Windows Live eVites …)
7 p.m.: Gates brings Mika Krammer, a director of product management for Windows, onstage to demo some new features of Windows Live.
6:59 p.m.: And here comes the product line-up overview: Windows Vista, Windows Live, Windows Mobile ….
6:58 p.m.: A key building block of the second digital decade, the centerpiece building block will be. … (drum roll, please) … Microsoft Windows!
6:56 p.m.: “Devices will know our context and location,” Gates continues. There will be new modes of interaction and natural interfaces. “We’re very interested in simpler ways of navigating our technology.” If he were going to announce Microsoft Bob 2.0, now would be the perfect time to do it. Nope. Ah, well. “The software industry will build these new modes of interaction–touch, voice, gesture–into the software.”
6:55 p.m.: And now for a few predictions. “In the future Microsoft products and services will run on the desktop and in the cloud,” he says. Would that be the cloud with all the Google AdWords all over it? “And 3-D environments will exist for Web experiences, high-quality video and audio in a pervasive way.” Make way for Third Life …
“Devices and services will be connected.” As an example, Gates talks about photos automatically being uploaded to digital-memory application.
6:54 p.m.: Gates back onstage discussing the coming transition in leadership at Microsoft when he will step down from his day-to-day role as the company’s chairman. He says Microsoft is aligned well for success with Steve Ballmer, Ray Ozzie and others.
Moving on … “The second digital decade heralds the following: high definition experience is everywhere.”
6:52 p.m.: Video ends to thunderous applause. UPDATE: Here’s the video:

6:50 p.m.: Footage of Gates cleaning out desk, taking box of office supplies to his Ford Focus. Ford Focus–now that’s funny.
Cut to Peter Jennings: “Let’s face it, all of us here at NBC News will miss reporting on this brilliant, powerful, sexy man who just doesn’t like to pay more than $7 on a haircut.”
6:49 p.m.: Gates calls Jon Stewart and asks about a co-anchor job. Stewart turns him down.
Gates calls Hillary Clinton. She turns him down as a running mate, so he calls Obama:
Gates: It’s Bill.
Obama: Bill Shatner?
Gates: No, Bill!
Obama: Bill Clinton?
6:48 p.m.: Steven Spielberg reviews Gates’s audition reel (”X-Men” and “Matrix” re-enactments; Gates in Wolverine get-up, Gates and Ballmer in Matrix-style black trench coats) and denies him a part in his next film.
6:47 p.m.: Footage of Gates calling Bono in the middle of a U2 concert. Gates plays guitar riff on “Guitar Hero” for Bono. Bono tells him there’s no place for him in U2. Which is OK, I’m sure, since there’s certainly no place for Bono at Microsoft.
6:46 p.m.: My God … Gates in recording studio with Jay-Z… Holy … Gates singing “Big Pimpin’.” Wild laughter and applause. “It was great,” Jay-Z tells Gates, before turning to the camera and muttering, “not so much.”
6:45 p.m.: Various Microsoft execs talking about Gates. Clip of Gates in office playing with action figures: “Never doubt the power of software.” Laughter.
Quickly followed by Gates in gym working out with Matthew McConaughey, who doesn’t really strike you as a Windows user.
6:44 p.m.: “This is my last keynote. Come July, it will be the first time I won’t be working at Microsoft since I was 17.” And here comes the inevitable farewell video ….
6:42 p.m.: He mentions the progression of digital entertainment–music, movies, photos. The trend is clear: all media and entertainment will be software driven in the second digital decade. And in the third, it will all be driven by Microsoft Windows! Muahahahahaha. Kidding … Moving on … “I’ll soon step down as chairman.”
6:40 p.m.: Gates finally takes the stage. He recalls his first keynote in 1994, a time when Windows ‘95 was first coming together. “It was the beginning of the first digital decade.” Ah yes, “The Digital Decade.”
6:39 p.m.: Here comes another silly video, this one set to “Believe in Magic,” featuring people from all walks of life extraordinarily happy to be using Microsoft products. They look like they’re all on Ecstasy. And it’s probably safe to say that nobody has ever looked like that while using a Microsoft product.
6:35 p.m.: Shapiro says Gates has given 10 CES keynotes, eight consecutively. He’s spoken at CES 11 times. Guess he must be the Guinness World Record holder. How ’bout that, huh?
6:33 p.m.: And here comes Gates. Wait–that’s not Gates. It’s Consumer Electronics Association President Gary Shapiro. OH RAPTURE! Disappointed applause. “In my opinion these are the best four days of the year,” says Shapiro. (Tell that to Steve Jobs next week.)
6:30 p.m.: Silly CES promo video… Correction: advertisement.
6:29 p.m.: Getting started right on time. Guess Jim Allchin and the Vista development team didn’t do Gates’s makeup this time around. Lights dim….
6:25 p.m.: In a few moments, Bill Gates, the Frank Sinatra of the Dat(a) Pack (Steve Jobs presumably in the Dean Martin role), will deliver his 11th Consumer Electronics Show keynote–and by many projections his last.
6:00 p.m.: The ballroom of the Venetian Resort Hotel Casino is pretty much packed, and like most things in Las Vegas it’s BIG. But it has to be the worst pre-keynote music EVER: from 1982 video game soundtrack to passed-out-after-the-rave techno to European disco to new wave. Really covering all the genres. At this rate, Bill Gates could take the stage to the theme from “The Dukes of Hazzard” or the “Annie” soundtrack.

Looking five, six, seven, 10 years ahead, advertising will become 15%, 20%, 25% of Microsoft’s business. As much as people have bones to pick with advertising, people much prefer an advertising-funded experience to one they pay for.”

–Microsoft CEO Steve Ballmer

Viacom has a new online advertising partner and–big surprise–it’s not Google. It’s Microsoft.

The entertainment broadcaster has signed a far-reaching, five-year strategic partnership with the world’s largest software company valued at approximately $500 million. Under its terms, Microsoft will buy ads across Viacom’s broadcast and online networks and license content from its MTV, Comedy Central, BET and Paramount Pictures properties for use on the MSN Web site and the Xbox 360.

In return, Viacom will adopt Microsoft’s Atlas AdManager digital-advertising technology and grant Redmond the exclusive right to sell remnant display-advertising inventory on its U.S. sites.

Quite the partnership, and one that may further in evolve in the years ahead. “This broad-based relationship will lead to conversations in other business areas,” Viacom CEO Philippe Dauman told Reuters. “What impressed me was the extent to which Microsoft is making the commitment–technological, financial and otherwise–to be a winner in this space.”

“Financial and otherwise,” indeed. As Om Malik notes, Viacom seems to have gotten itself quite a deal from Microsoft. “Viacom doesn’t have to spend anything and at the same time it is getting advertising dollars and more distribution for their content,” he writes. “I get a feeling that, going forward, this is going to become a template deal for all large media companies with content assets. For them it’s a green light to pillage Microsoft’s overflowing coffers. Deals like this will increase the pressure on Google to do similar ones with other content providers, mostly to thwart Microsoft’s advertising ambitions.”

We really need to move the thinking about the social graph. This exists out in the world, and has always existed. We didn’t invent it. How can we ‘own’ it? We’re just trying to map it out. We have a model of the social graph that we’re constructing.”
–Facebook CEO Mark Zuckerberg

We have address books, and the sum of the address books is the social graph.”
–Google CEO Eric Schmidt

Turns out that the “social graph” about which Facebook CEO Mark Zuckerberg so often speaks these days isn’t just a decades-old computer science term, it’s the basis for the monetization platform that will someday justify Facebook’s $15 billion valuation. Or so the theory goes.

On Nov. 6, Facebook will make a major announcement at the ad:tech conference in New York. And ad-industry executives familiar with the company’s plans say it will revolve around an advertising network reportedly called SocialAds. As described in Facebook’s Sept. 24 trademark filing of the term, SocialAds are “advertising and information distribution services, namely, providing advertising space via the global computer network; promoting the goods and services of others over the Internet.”

But–again according to those faceless ad-industry executives–the SocialAds network may be quite a bit more than that. It might use permission-based demographic targeting to deliver ads to users on Facebook–and off, says Altura Ventures’ Lee Lorenzen, who offers this hypothetical breakdown of the service:

• Facebook (with Microsoft’s help) will offer a competitive solution to Google AdSense for non-Facebook Web sites.
• You can think of this service as an open-source AdSense solution where Google can provide ads into it (if they document what the Web site owner will earn) but Google (and any other ad providers) will have to compete with ads that Microsoft can provide that are Facebook-enhanced.
• The innovation here is that Microsoft’s ads will be able to pick up the user’s Facebook cookie (for the 50-million-growing-to- 200-million users who already have a cookied-Facebook account).
• This means advertisers in Microsoft’s adCenter can offer a much higher CPC or CPM payment to the Web publisher because they will know that the user viewing the Web page is actually a Facebook user that, for example, happens to be an 18-year-old male with a birthday in three weeks who mentioned Xbox on his profile page.

If Lorenzen’s right, SocialAds might easily justify Microsoft’s $240 million investment in Facebook.

It’s hard to believe that the handful of announcements made last night will gain it much truck in the next-generation console war, but you never know–especially the way things are going over at Sony.

So what were the announcements? A bunch of knock-’em-down, shoot-’em-up, carjack-’em-and-run-’em-down Xbox 360 games like Madden NFL 08, Halo 3 and Grand Theft Auto IV. And a new Fisher-Price-looking controller called “big-button pad” that’s meant to be less intimidating to new gamers. “For the Xbox 360 and the industry to grow, you’re going to need a lot more social experiences that are not intimidating and easy to jump into,” said Shane Kim, corporate vice president of Microsoft Game Studios. “That’s what we’re doing with the big-button pad. You realize it’s something that’s not intimidating.”

Nope. Definitely not that. Looks like a big baby rattle … or something you might find at Good Vibrations. Anyway, Microsoft is packaging big-button pad with Scene It?, a trivia game similar to You Don’t Know Jack, presumably in the hopes that it will loosen’s Wii’s stranglehold on the casual-gaming market a bit.

In the end, Microsoft’s E3 event was most notable for what didn’t occur. The company did not cut the price of the Xbox 360, as some had speculated it would after Sony slashed the price of the PlayStation 2. “We feel really good about where we’re at right now,” Kim told the Seattle Post Intelligencer. “Of course, we’re always going to be looking at those opportunities. But we’re certainly not feeling any pressure to react to anything that Sony has done.”

Q: Your returns as a category. Is there any No. 1 reason for a return?
A: There are no systematic issues. The vast majority of the people just love the product, have a great experience with it. When there is an issue, we get on it and address it as quickly as possible.

Q: What explains this anecdotal evidence that it’s out of whack, compared to the Wii or the PlayStation 3 or other consoles?
A: I would go back and say the vast majority of people love their experience. We continue to go back and address all of these issues on a case-by-case basis. There is a vocal minority out there. We go off and try to address their issues as quickly and as pain-free as possible.

–Excerpt from a San Jose Mercury News interview with Todd Holmdahl, Microsoft’s corporate vice president of Gaming and Xbox Products Group.

Microsoft choked down a big plate of crow this morning, acknowledging widespread reports of Xbox 360 failures and offering full repairs for the most widely reported console malfunction, the so-called red ring of death.

“The majority of Xbox 360 owners are having a great experience with their console and have from day one,” Robbie Bach, Microsoft’s president of Entertainment and Devices, said in a statement. “But, this problem has caused frustration for some of our customers and for that, we sincerely apologize.”

“Some” of your customers? Try a third to as many as half. Because that’s what the size of the $1.15 billion anticipated repair bill Microsoft put forth today would seem to imply and anecdotal reports have already suggested that “some” may be a number as large as 33%.

And frankly, that’s not hard to believe given tales of Xbox 360 woe such as this one from gamer Rob Cassingham, who had six consoles fail on him. “The first machine I had was the Magnavox Odyssey in 1972,” he told the San Jose Mercury News. “I have never had to send any of them back. The gaming experience has been wonderful. And Xbox Live is great. But the reliability of this thing. … I had six machines, and seven (counting one replacement) crapped out. That’s not OK. If I had 100 machines and seven crapped out, that’s OK.”