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Microsoft posted an 18% drop in fiscal first-quarter earnings, as revenue fell 14%.

The software maker, however, said it was pleased with the results and demand for its Windows operating system. Its latest version, Windows 7, went on sale Thursday.

Highlights from Microsoft’s earnings call:

10:22 a.m. EST: Early takes — Kirk Materne at Rafferty Capital Markets writes, “We were somewhat surprised by the strong consumer demand and would note that this outperformance also positions Microsoft well should the enterprise level pick up in 1H10. Additionally, Microsoft’s increased focus on cost control appears to have staying power, as the company continues to execute more efficiently and drive bottom line outperformance.”

“The solid deferred revenues and better cost controls should bode well for upward EPS estimate revisions for FY10. MSFT is apt to offer some cautious commentary based on macroeconomic factors in order to contain Windows 7 expectations, but F1Q10 marks a solid start to the Windows 7 cycle in our opinion,” writes Kevin Buttigieg at FTN.

10:27: Microsoft CFO Chris Liddell and Chief Accounting Officer Frank Brod will be hosting the call.

10:32: The call is starting. Liddell cites cost control and demand for products such as the Xbox, for the results, and says the fiscal fourth quarter may have represented the bottom of the recession for Microsoft.

10:36: Headcount was 4% lower at the end of the quarter, compared with the year-earlier period, the first time “a reduction of that significance” has been achieved in the company’s history, he says.

10:37: Bill Koefoed, investor relations, notes Microsoft’s deferred revenue for early sales of Windows 7.

10:39: MS estimates that the consumer PC market was up in the mid-single digits, primarily due to netbooks. Netbooks represented about 12% of the total PC market, “significant growth over the prior year,” he says.

10:41: Q1 represented highest number of Windows licenses sold ever, and September was strongest month ever in terms of Windows-license unit sales. “It was a very solid quarter for the Windows division,” and Windows 7 is a great product for the recovering PC market, Koefoed says.

10:42: Win Server’s virtualization capabilities are the best in the market, he says.

10:43: Online advertising revenue down 3% — continued growth in page views, but ad-rate declines weighed on display advertising. U.S. search revenue up in mid-single digits. Bing’s market-share has grown every month since the June release, he says. “Working through the regulatory review process” regarding its partnership with Yahoo. He mentions recent deals with Facebook and Twitter as well, which demonstrate Microsoft’s innovation with social media and real-time content, he says.

10:44: Overall gaming revenue up almost $100 million. Halo 3 was the top-selling videogame in the U.S. last month, along with five other Xbox 360 games in the top 10. Almost 34 million Xbox 360 consoles are out there. Xbox Live revenue growth up more than 50%, and “we believe consumers will be excited by the richer multimedia enhancements and integration with social networks that we are delivering this fall,” Koefoed says.

10:46: Consumer segment performed better than expected, Koefoed says.

10:47: CIOs remain cautious about spending budgets, Liddell says. Windows 7 revenue is expected to be in line with the PC market’s performance. Expect to recognize all of the deferred Win 7 revenue in 2Q.

10:50: Lowers full-year operating-expense forecast to $26.2 billion to $26.5 billion. (fixed — we mistakenly said revenue, not opex, forecast earlier)

10:51: “Our strategies will position us to take advantage of a recovering economy,” Liddell says.

10:55: “Basically no revenue contribution” this fiscal year resulting from the Yahoo deal, Liddell says.

11:01: On the business side, anecdotal feedback on Win 7 has been good. Still staying “reasonably cautious” on the upgrade cycle — would like to see it start next calendar year, but it could be spread out over a few years, he says.

11:04: “People are clearly willing to pay for Windows on their netbook,” Liddell says. Still a small part of the overall PC market.

11:06: Is display advertising getting ignored because of the increasing focus on search advertising? We’ve seen good volume, the difficult part is monetization, because of the overall economy, Liddell says. Budget cuts may have pushed some marketers toward search, so that may change as the economy improves. Certainly there’s a lot of focus on search, but no lack of attention on display, either, he adds.

11:08: PC unit sales are rebounding quickly, he says. What I think we’re seeing is the robustness of the consumer PC — even in a down economy, it’s something people want. The big variable in terms of a rebound is the strength and speed of the business-PC refresh cycle.

11:11: Europe is relatively weak, probably the weakest area on a relative basis, Liddell says. China was very strong, the U.S. is recovering. Recovery in Europe will happen when there’s a broader economic recovery.

11:17: Would like to think we’re going to see display rates go up as the economy recovers, he says. “Certainly it stopped getting worse, and stabilizing,” likely next calendar year, and it will probably be gradual.

11:19: Call ends.