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7/20/2012
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Paul McDougall
Paul McDougall
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Microsoft's Fourth Quarter Shines, Despite Loss

Strong performance across key product lines shouldn't be overshadowed by one-off accounting moves.

Microsoft posted its first-ever quarterly loss Thursday, reporting that EPS was in the red by 6 cents. But dig deeper and it's clear that Redmond is clicking on all--well, almost all--cylinders.

First, the loss. On July 3, Microsoft announced it would write down the goodwill value of its aQuantive online ad unit by $6.2 billion--about equal to what it paid to acquire the company in 2007. Microsoft conceded at the time that "future growth and profitability are lower than previous estimates" for the operation.

The fact is, Microsoft didn't know much about the ad business when it acquired aQuantive, and the company's ad-serving technology never quite meshed with Redmond's existing platforms. But to keep things in perspective, Microsoft's digital ad business accounts for well under 4% of total revenue. If it disappeared tomorrow it wouldn't be much more than a footnote on the balance sheet.

Much more important is the fact that the areas where Microsoft makes its real money--PC and server software, services, and tools--are hot, even in a slow economy that's seeing rivals like IBM struggle to grow revenue.

[ For another perspective on Microsoft's market position, see Microsoft A Victim Of Its Own Success. ]

Ahead of the formal launch of Windows Server 2012 in September, Microsoft's Server & Tools unit saw a 13% increase in sales. Office and related sales, meanwhile, were up 7%, despite the fact that Office 2013 will debut later this year.

The Xbox, meanwhile, continues to roll as add-ons like Kinect and the potentially revolutionary SmartGlass keep the franchise fresh. Xbox and related revenues were up a whopping 20% in the quarter. Microsoft's Online Services unit, despite aQuantive's poor performance, still managed to grow 8%, mostly due to gains in the Bing search business.

Which brings us to Windows. Sales were down 13%, but it's more complicated than that. Microsoft on June 2 introduced a program in which consumers who purchase a new Windows 7 PC can upgrade to Windows 8 for just $15 when it debuts on Oct. 26. Accounting rules forbid Microsoft from recognizing that revenue on its books until after the upgrade period expires on Jan. 31.

So Microsoft's Q4 results don't include revenue from Windows 7 systems purchased between June 2 and June 30, when the quarter closed. If they did, Windows revenue would have been down just 1%. Not great, but not bad considering that many consumer are holding off on purchases until new Windows 8 hardware hits stores later this year.

Here's what Microsoft's Q4 numbers look like with and without the aQuantive charge and Windows deferral: --With the charge and deferral, total revenues at $18.1 billion, up 4% from the previous year. Operating income down 97%, to $192 million, and EPS minus $06. --Without the charge and deferral, total revenue at $18.6 billion, up 7%, operating income at $6.9 billion, up 11%, and EPS of 73 cents, up 6%.

To boot, Microsoft's total Q4 revenue of $18.1 billion and sales of $73.7 billion for its 2012 fiscal year were both company records.

"We delivered record fourth quarter and annual revenue, and we're fast approaching the most exciting launch season in Microsoft history," said CEO Steve Ballmer, in a statement. Ballmer's baseline exuberance is at a level that would be considered manic for most people, but these days his optimism is justified.

At this year's InformationWeek 500 Conference C-level execs will gather to discuss how they're rewriting the old IT rulebook and accelerating business execution. At the St. Regis Monarch Beach, Dana Point, Calif., Sept. 9-11.

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melgross
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melgross,
User Rank: Ninja
7/22/2012 | 4:03:30 PM
re: Microsoft's Fourth Quarter Shines, Despite Loss
I think there is too much exuberance over this. Microsoft is clearly slowing down as far as growth is concerned. This was a modest amount of growth, all things considered. But you gloss over areas of negativity as though they don't matter. I'm reading articles where the writer doesnt seem to actually inderstand any of this. The Entertainment division lost $350 million even thought its been combined with the profitable devices division in an attempt to conceal, as much as possible, those losses. This is area that Microsoft insists is of major importance to them, but has managed to lose over $8 billion over the years, with no realistic shot of making a long term profit from.

Then, of course, is the online division, which has also lost billions, and whose losses not only continue to mount, but are getting larger. No chance of making any profits there either.

The phone division, also combined, is a failure so far, with a hope, nothing more yet, that wp8 will turn that around. They've lost a few billion there too.

Win 8 has not received a great welcome. I read that some think this will be their salvation in tablets too. But the evidence so far is that Windows users dislike it intensely. There is no advantage to buying their tablets, and we don't know if they will fail as well, but I can see any number of scenario's in which they do, and little in the way of success.

So actually, this quarter wasn't so great after all, as Office sales increases have been slowing down over the past few years, Windows sales have stops growing since late 2010, well before Win 8 was expected, so it's not just due to that.

Nothing is making money other than their monopoly Windows and Office, while everything else is losing money quickly. The question is whether they will be losing money more quickly then they will be making money in a few years, as the areas where they are losing money are growing that loss more quickly than the areas in which they are making money are growing.
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