Iconic computer firm Microsoft has reported far higher than expected profits, helping to restore investor confidence in the battered technology sector.

Results for the first quarter were exceptionally strong

Microsoft finance chief John Connors

Microsoft said profits for the July to September period came in at $2.73bn (�1.7bn), beating analysts' forecasts by 8%.

The figure, released after the close of stock trading in New York on Thursday, was more than double the $1.28bn in profits that the firm reported in the same period last year.

Sales came in at $7.75bn, up from $6.13bn a year before, and ahead of an in-house forecast of $7.0-7.1bn.

"Results for the first quarter were exceptionally strong, exceeding our expectations," said John Connors, Microsoft's chief financial officer.

Based on the healthy first-quarter results, Microsoft raised its expectations for full-year earnings, which it will report next summer.

Market reaction

The news prompted a 5.5% rise in Microsoft shares in after hours trading, and is expected to push shares higher when Wall Street opens later on Friday.

Microsoft's stellar performance also supported European technology shares in early trade, with German software designer SAP surging more than 4% and French rival Thomson Multimedia climbing 5%.

In London, shares in software maker Logica was up about 3%.

Cash generator

Analysts credited Microsoft's profits surge to the introduction in August this year of a subscription-based scheme for updating software.

Microsoft, best known for its Windows software programme, designed the scheme in the hope of steadying its cash flow.

The scheme sees Microsoft customers pay an annual subscription, which also entitles them to upgrade to the latest version of software as soon as it becomes available.

Perviously, customers paid a one-off licence fee, and were then offered discounts on upgrades.

But critics say that, by eliminating the discounts, the new scheme forces customers who update software less often to spend more than they would have done under the old system.

They say that the new licensing system could divert corporate spending from personal computers and other equipment, prolonging the tech sector recession.