Oct. 23 (Bloomberg) -- Microsoft Corp., the world's largest software maker, reported profit and sales that beat analysts' projections as demand for Office and the Xbox video-game console held up amid the economic slowdown.

First-quarter net income rose 2 percent to $4.37 billion, or 48 cents a share, the company said today in a statement. That topped the 47-cent average of estimates compiled by Bloomberg. Microsoft forecast annual earnings of as much as $2.10 a share, compared with the $2.11 projected by analysts.

The report signaled profit will hold up better than some investors anticipated as customers deal with the economic crisis. The company plans to cut $500 million in spending by trimming hiring, travel and marketing, Chief Financial Officer Chris Liddell said. Office software sales rose 20 percent last quarter, while a price cut accelerated demand for the Xbox.

``We were satisfied with the quarter, and we think their outlook for the year, given a very uncertain economic outlook, is very strong,'' Jim Hardesty, president of Hardesty Capital Markets in Baltimore, said in a Bloomberg Television interview. ``They're doing what they should do in an environment that is relatively tough.''

Sales this year will be $64.9 billion to $66.4 billion, compared with the $66.7 billion predicted by analysts.

Microsoft, based in Redmond, Washington, rose 8 cents to $22.40 in extended trading after closing at $22.32 on the Nasdaq Stock Market. The shares have lost 37 percent this year.

`Realistic'

``Our forecast reflects a much more realistic position in terms of giving people some sense of the variability we are seeing,'' Liddell said in an interview. ``It's incredibly difficult to extrapolate trends.''

Sales rose 9.4 percent to $15.1 billion in the quarter ended Sept. 30, beating analysts' average estimate of $14.8 billion. Liddell said the quarter was ``generally very good,'' until the end, when the company saw a ``softening'' in demand. In the year-earlier period, Microsoft reported profit of $4.29 billion, or 45 cents a share.

Microsoft is better positioned than some competitors to weather a slowdown because many clients have long-term contracts. Sales of such agreements rose more than 20 percent in the company's three biggest businesses. That may help Chief Executive Officer Steve Ballmer protect Microsoft from swings in corporate spending.

``There are some bright signs in this for sure,'' said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon. He recommends buying Microsoft shares and doesn't own any. ``This a positive indicator for the tech sector, particularly for enterprise spending.''

Office Sales

Revenue in the Microsoft Business Division, mostly Office programs, rose 20 percent last quarter to $4.95 billion, beating the company's forecast for an increase of as much as 16 percent. Sales were bolstered by rising consumer demand in response to promotional pricing on Office 2007 packages.

Sales in the Xbox unit fell 6 percent, less than the decline of as much as 26 percent Microsoft had forecast. In the year-earlier period, the company released the blockbuster ``Halo 3'' video game. The company sold 2.2 million Xbox units during the quarter. Internet revenue rose 15 percent, ahead of a forecast for growth of as much as 11 percent.

Those results offset weaker-than-forecast sales of Windows for personal computers, which grew 1.9 percent instead of Microsoft's prediction of at least 6 percent. Sales were hurt by rising demand for so-called ``netbooks,'' or low-cost notebooks, an area where Microsoft gets less money per copy of the operating system.

Server software sales increased 17 percent, missing Microsoft's forecast for a jump of at least 19 percent.

Deteriorating Economy

Corporate spending on computers, software and communications equipment may decline as much as 5 percent next year, according to Jane Snorek, an analyst at First American Funds in Minneapolis.

Liddell said renewals of multiyear contracts may be ``under pressure'' in the future and could impact the company in the fiscal year that begins July 1, 2009.

Still, in a deteriorating economy, companies also tend to purchase from fewer suppliers, favoring large firms such as Microsoft, according to UBS AG analyst Heather Bellini in New York.

Competitors Google Inc. and International Business Machines Corp. reported better-than-anticipated earnings in the past two weeks. Google benefited from the shift of advertising budgets to the Web, while IBM gained from sales in developing countries and new service contracts.

Microsoft will continue to spend in areas such as updates to its main programs, Web-based software and Internet telephony and teleconferencing features, which cost-conscious companies are using to replace travel, Liddell said.

During the quarter, Microsoft sold $2 billion of commercial paper, Liddell said. The company may continue to sell ``modest amounts'' in the future.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: October 23, 2008 19:14 EDT