Microsoft earnings: Windows wasn’t as bad as expected but it wasn’t good either

The biggest news out of Microsoft’s (s msft) third quarter earnings call was that its flagship Windows business held up better than expected after reports of the demise of the PC market. But it still wasn’t perky. Once a big¬†upgrade was factored in, Windows revenue was flat year over year — more sobering news for a company that built its fortunes providing operating system for PCs.

All things considered, however,¬†Microsoft had a pretty good quarter — with profit of $6.06 billion, up a healthy 18.5 percent from a year ago. Not bad for a company that’s been slammed for missing the smartphone and tablet revolution. It shipped Windows 8 in November as part of its bid for credibility in these new form factors, but the OS met with mixed reviews. On the call, Microsoft CFO Pete Klein (who will leave the company at the end of the fiscal year) noted the challenge:

“There is no doubt that the device market is evolving. Consumers and businesses are increasingly shifting their focus to touch and mobility, and as a result, they want touch-enabled computing devices that are ultrathin, lightweight, and have long battery life. While Windows revenue has been impacted by the transition from the traditional PC to a new era of computing devices, the overall addressable markets are growing, and we are excited by the opportunities ahead of us.”

He reiterated that it is moving to an “accelerated pace for updates and innovations” starting with Windows 8 to meet the challenge.” windows3q Klein also said Microsoft’s big investment in cloud is starting to pay off with broader adoption of Office 365, which delivers including Word and Excel functionality as a service. “One in four of our enterprise customers now has Office 365, and the business is on a $1 billion annual revenue run rate,” Klein said.

Some on Twitter noted that in a dismal economy Microsoft managed to post pretty impressive profit growth. Maybe that means folks will stop calling for Microsoft CEO Steve Ballmer’s head. But then again, maybe not.