The results buoyed optimism around the world's largest software maker, which is lining up a new tablet-friendly version of Windows for later this year and is looking to make a dent into Apple Inc
The results were a fair amount better than we were looking for, said Rick Sherlund, an analyst at Nomura Securities. Overall revenue growth was 6 percent, and this is before the new product cycle, which should come around October.
Microsoft - whose shares hit a 4-year high of $32.95 last month - has not said when its Windows 8 system will be released, but most in the industry expect it on devices from around October, offering an alternative to Apple's runaway iPad. New Windows smartphone software is expected around the same time.
Next year at this time we should be talking about Windows 8 mobile and how it's contributing or not to the company, said Kim Forrest, analyst at Fort Pitt Capital Group. But we really need Windows 8 to come out on all devices, to see if it's going to have that synergy or not.
The Redmond, Washington-based company reported fiscal third-quarter profit of $5.11 billion (3.18 billion pounds), or 60 cents per share, compared with $5.23 billion, or 61 cents per share, in the year-ago quarter when it posted a one-time tax gain.
Profit beat analysts' average forecast of 57 cents per share, according to Thomson Reuters I/B/E/S.
Sales rose 6 percent to $17.41 billion, driven by strong demand for its server software products and Office application. Analysts had expected sales of $17.18 billion.
Worldwide personal computer sales rose a modest 1.9 percent in the quarter, according to tech research firm Gartner Inc. That was better than expected in a market facing hard-drive shortages from Thailand and the onslaught of Apple Inc's
That helped Microsoft, which supplies the operating system for 90 percent of PCs, to post a 4 percent increase in sales of Windows, still its main product.
The Windows beat was a positive surprise, looking at about 4 percent growth, versus expectations for about a 4 percent decline, said Josh Olson, an analyst at Edward Jones.
We also had solid business and server performance as well. The Big Three, if you will, in terms of the revenue drivers, were all a little bit better than expected, with Windows a lot better than expected.
On the downside, Microsoft's usually profitable entertainment and devices unit posted a quarterly loss due to falling sales of its aging Xbox console and increased research and marketing costs for its new Windows smartphone software.
There was weakness in entertainment and devices, said Sid Parakh, an analyst at McAdams Wright Ragen. If that were to have come in in-line, it would have been a pretty nice beat.
Traditional console sales are down across the board this year - hurting Microsoft, Sony Corp <6758.T>
Microsoft shares rose to $31.87 in extended trading, after closing at $31.01 on Nasdaq.
The stock is up 20 percent so far this year, outpacing the tech-heavy Nasdaq's 16 percent gain, and a 10 percent rise in the Standard & Poor's 500.
But it is still below levels of 10 years ago, as investors worry about the company's ability to match Apple and Google in online and mobile technology. Apple's market value is now comfortably twice that of Microsoft, and its sales of iPhones last quarter exceeded Microsoft's overall revenue.
Microsoft is the cheapest of the big tech stocks, with a price hovering around 10.7 times expected earnings for the next 12 months, or about 14 percent lower than its peers, according to StarMine.
(Additional reporting by Alexei Oreskovic and Alistair Barr; Editing by Richard Chang)