Microsoft has revealed first quarter profits up 11% year-on-year. The technology giant said server software and entertainment products were largely responsible for the boost.

But the results failed to impress financial analysts, who say increased research and development (R&D) spending will swallow the gains made.

Chris Liddell, Microsoft chief financial officer said server and tools revenue increased 17% year-on-year, due to sales of server products SQL, Windows, BizTalk and Visual Studio. SQL Server 2005 experienced revenue growth of over 30%.

The Entertainment and Devices Division revenue grew 70% driven by demand for Xbox 360 products, with 6 million consoles sold worldwide.

Kevin Turner, Microsoft chief operating officer said the company was looking towards 2007 now, and the upcoming releases of the 2007 Microsoft Office system, Windows Vista and Exchange Server 2007.

CIBC World Markets analyst Brad Redback said Microsoft’s rating would see it remain a "sector underperformer" despite shares trading at 19 times his earnings estimate for calendar 2007.

Redback’s said in a client note: "Given the significant level of spending outlined by management and the subsequent lack of earnings upside potential near term, we contend that further multiple expansion from current levels appears unlikely."

The company announced first quarter revenue of $10.8 billion for the period ended 30 September 2006. Operating income for the quarter was $4.5 billion, an 11% increase compared with $4.05 billion in the prior year period.