Microsoft saw Windows 7 carry them to a strong fourth quarter last year—but its Online Services division (home of Bing) didn’t see a boost, according to the official reports. Microsoft emphasized Bing’s growth and the fact that their search advertising somewhat offset other losses, but the division still operated for a loss.

Microsoft reported $17.3B in revenue ($0.60/share), including a deferral of $1.7B on the Windows 7 release. They were expected to hit $17.9B ($0.59/share). For the quarter, the Online Services division saw $581M in revenue (down 5% YOY), and an operating loss of $466M (a 46% increase over last year).

Microsoft emphasized the gain in search market share and search advertising revenue. Much of the division’s losses ($29M, a 14% YOY loss) came from the Access department, Microsoft’s ISP and subscriptions to online paid services. Online advertising also saw a decline ($11M, a 2% YOY loss) but Microsoft claimed that, without the Access numbers, the Online Services division was inline with industry losses for online advertising. The losses came from display, but search’s increase wasn’t enough to counteract those losses completely.

Naturally, Microsoft closes the disappointing report with a note of (what they hope will be) good news:

On December 4, 2009, we entered into a definitive 10-year agreement with Yahoo! Inc. (“Yahoo”) whereby Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo websites. We believe this agreement will allow us over time to improve the effectiveness and increase the value of our search offering through greater scale in search queries and an expanded and more competitive search and advertising marketplace. The transaction is subject to regulatory review; we expect to close the transaction in fiscal year 2010.

What do you think? Will the deal with Yahoo—where Yahoo’s display advertising and Bing’s search (and search advertising?) will run for both sites—improve both their fortunes?

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