Surprising Strength in Server and Tools

But Windows Client numbers are telling enough. Like the previous quarter, declining PC shipments and increasing netbook sales were gravity pushing down Windows Client numbers. Microsoft reported that OEM revenues fell 19 percent, or $637 million, while unit shipments dropped only 6 percent. The difference: Continued decline of premium SKUs, which accounting for only 62 percent of Windows licenses. Netbooks largely account for the shift in mix and difference between OEM revenue and licenses.

Server and Tools

This is Microsoft's most important line of business during the economic downturn, because, in theory, it is more insulated. Annuity licensing accounts for about 65 percent of sales, offering much greater cushion against slower hardware sales than PCs. Microsoft reported double-digit annuity licensing growth. Year-over-year revenue growth: 7 percent. But income growth was much greater: 24 percent.

Server and Tools revenue was $3.46 billion and operating income was $1.34 billion. The revenue number is simply stunning. For the first time, and in a surprising turn of fortune, Server and Tools revenue topped Client. If the trend continues, Server and Tools would become more important to Microsoft. Considering how much annuity licensing insulates the division from economic hills and valleys, Server and Tools ascension over Client would be good for Microsoft long-term.

Microsoft attributed the 7 percent revenue increase, or $191 million, primarily to growth in client-access licenses for SQL Server, System Center and CAL suites.

Business

Like Server and Tools, Microsoft's Business division is more insulated from the economy by annuity licensing - but to much less degree. As such, the slowing economy nipped the division, driving revenue down by 5 percent and operating income by 8 percent. Still, Business continued to be Microsoft's most important division, reporting $4.5 billion in revenue and $2.87 billion operating income.

Business division revenues declined where they were most exposed: outside annuity licensing. Consumer revenue declined a stunning 30 percent, or $299 million. Microsoft mostly attributed the decline to weak PC sales. By comparison, business revenue increased 2 percent, or $73 million. Two problems with business revenue: Dynamics customer billings declined 8 percent, and broader volume-licensing growth reflected past rather than new bookings.

Online Services

Microsoft's beleaguered Online Services Group posted yet more dismal results, with revenue down 14 percent year over year and operating income down a whopping 154 percent. Online advertising revenue declined 16 percent, spurred on by declining display ad rates. Online advertising declined by $98 million to $521 million.

Entertainment and Devices

E&D delivered surprising results. While revenue dropped 2 percent year over year, operating income was flat. These numbers are surprising because Xbox console sales grew about 30 percent, or 1.7 million consoles sold in the quarter. Xbox typically drives up revenue while sapping operating income. For the quarter, revenue reached $1.56 billion for an operating loss of $31 million.

Microsoft's Macintosh Business Unit is part of Entertainment and Devices. In the past Mac sales have been good to Microsoft, but not during fiscal third quarter. Mac application software sales dropped a stunning 63 percent, in part because of the year-over-year comparison to the launch of Office 2008 and also because of declining Mac computer sales.

Joe Wilcox is editor of Microsoft Watch.