Jan. 28--It's a rare quarter when Microsoft is not all about Windows.

In a report of its financial performance, Microsoft said Thursday that sales in the quarter ended Dec. 31 soared on the holiday success of Xbox Kinect and Office.

The Windows picture was less rosy. Sales of the company's flagship operating system decelerated along with computer sales in the second quarter of Microsoft's fiscal 2011.

The Kinect motion sensor for the Xbox 360, by contrast, rocketed from 0 to 8 million units sold in two months, and Office 2010 was a hit with consumers and businesses, growing 24 percent.

"Good numbers, except the Windows number. Everything else looked good," said Sid Parakh, analyst for McAdams Wright Ragen who follows Microsoft.

Sales for the quarter, $20 billion, were close to a billion more than what analysts had expected and an increase of 5 percent from the $19 billion in sales the company had the year before.

Not counting the sales from the Windows 7 upgrade program booked in the second quarter of fiscal 2010, sales increased 15 percent.

Earnings for the quarter were 77 cents a share vs. 74 cents in the same quarter the year before. Analysts were expecting a profit of 68 cents a share.

The company reported a net profit of $6.6 billion, a 0.4 percent decline from $6.7 billion a year ago. Earnings per share grew despite a slight drop in net profit because of the stock Microsoft bought back from shareholders.

"Business and consumer response to our latest wave of innovation, including Office and Kinect, helped drive another quarter of revenue growth," Chief Financial Officer Peter Klein said in a conference call with analysts.

Most notably, however, Microsoft acknowledged for the first time that tablets such as Apple's iPad are eating into PC growth, particularly netbook sales. In its October earnings call, the company said it did not see a material shift to tablets.

In Thursday's call, Klein said, "What we've seen in the course of this year in the consumer space is some of their volume being replaced by ultraportables and tablets. Normally, these are secondary devices. That's caused a little bit of drag on the consumer side."

The competition will intensify this summer as a wave of tablets running Google's Android operating system is set to hit the market.

Microsoft has yet to enter the tablet market in a big way, and many question whether the company will be able to extend its dominance in the PC market into tablets.

Sales projected

The company does expect sales of its current version, Windows 7, to remain strong among businesses as consumer sales fall. It also projects that sales in developing markets will grow while sales in developed markets will fall.

"Windows 7 and Office 2010 remain among the highest priorities for 1/8chief information officers3/8," Klein said. "We expect the business PC refresh cycle to continue. In terms of PC growth, we expect business to outpace consumer and emerging to outpace developed 1/8markets3/8."

Microsoft's stock closed at $28.87 Thursday, up 9 cents. The stock jumped up briefly before the stock market closed after media outlets reported financial results from a "preproduction draft" of Microsoft's earnings report that a New Jersey market-information company told Bloomberg News it had unearthed. In after-hours trading, the stock fell 12 cents to $28.75.

Here is how Microsoft's divisions performed in the quarter:

Windows. The Windows division reported sales grew 3 percent, adjusted for deferred Windows 7 sales, to $5 billion. Operating profit for the quarter was $3.3 billion. The financial adjustment for the Windows 7 upgrade program subtracts the sales of Windows in the months before the 2009 launch that were recorded in the second quarter of fiscal 2010. The company has sold 300 million copies of Windows 7 since it launched in October 2009.

The company appears to be trying to shift the public's mindshare to the next version of Windows, which is expected to come out between the fall of this year and 2012. At the Consumer Electronics Show in Las Vegas this month, Microsoft showed Windows running on a chip, an architecture that could spark a proliferation of mobile devices running Windows.

Business. The division that makes Office had significant growth in the quarter, with sales increasing 24 percent to $6 billion. This was the first holiday season after Office 2010 came out. Operating profit grew 35 percent to $4 billion."Office 2010 is 50 percent ahead of Office 2007 in terms of consumer adoption in a comparable time period," said Todd Setcavage, director of investor relations at Microsoft. "That's the fastest version of Office we've ever sold." Lync, a re-branded version of Microsoft's unified communications software, has grown 20 percent, the company said, and sales growth of SharePoint and Dynamics CRM grew in the double digits.

Server and Tools. The group that makes Windows Server, SQL Server and Azure saw sales grow by 10 percent to $4.4 billion. Operating profit increased 21 percent to $1.8 billion. Earlier in January, the company announced Bob Muglia, the Server and Tools division president will leave Microsoft.

There was some speculation that his exit may have been prompted by poor performance in the server division, but the group posted growth in sales and profit.

Online Services. Sales in the division that works on Bing and MSN recorded sales growth of 19 percent to $691 million. The group's operating loss widened 17 percent to $543 million. The company said online ad sales grew 23 percent as a result of growth in search traffic. The company continues to migrate Yahoo search traffic and ad sales from different countries to Bing and the Microsoft ad platform under the Microsoft-Yahoo search partnership.

Entertainment and Devices. Sales grew 55 percent to $3.7 billion and operating profit grew 86 percent to $679 million. The group makes the Xbox 360 and mobile software and launched the Kinect motion sensor and Windows Phone 7 during the quarter. Microsoft sold 8 million Kinect units in the quarter. Klein called it "the fastest-selling consumer-electronics device in history." The company sold 6.3 million Xbox 360 consoles, and Xbox Live subscriptions grew 30 percent.

"I think it's a real game-changing product in my mind," McAdams' Parakh said of the Kinect. "It's not a fad element that comes and goes. The broader message here is there are other applications of this technology in the mainstream that the company should be able to leverage in the future."

Microsoft also said it shipped 2 million copies of Windows Phone 7 to wireless carriers.

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com

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