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Microsoft Pri0

Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day.

July 20, 2012 at 6:00 AM

Microsoft posts loss as it writes down ’07 acquisition

[This story is running in the print edition of The Seattle Times July 20, 2012. – Janet I. Tu]

Despite its first quarterly loss as a public company, Microsoft on Thursday reported solid fourth-quarter results, ending its fiscal year on a firm footing.

As expected, the company posted a quarterly net loss — of $492 million — stemming largely from the $6.2 billion write-down related to its 2007 acquisition of online ad company aQuantive. Also a factor in the results was $540 million in deferred revenue from a Windows 8 upgrade offer the company announced in June.

But, as usual, big businesses were the life buoys carrying Microsoft through sometimes choppy waters.

That was especially noticeable in the Server and Tools division, which logged its ninth consecutive quarter of double-digit revenue growth, with sales of $5.1 billion in the fourth quarter. For the fiscal year, the division recorded $18.7 billion in revenue — about $300 million more than Windows, the name brand for which Microsoft is arguably best known.

The Business division, which includes the Office cash cow, also did well, with sales growing 7 percent compared with a year ago, to $6.3 billion in the fourth quarter and $24 billion for the fiscal year.

In addition, commitments from big businesses to multiyear licenses for Microsoft products and services were strong, resulting in 14 percent revenue growth for such licenses and a record unearned revenue balance of $20.1 billion, according to the company’s 8-K filing with the Securities and Exchange Commission.

“The enterprise business is clearly strong,” said Sid Parakh, senior vice president of equity research with McAdams Wright Ragen in Seattle.

“More customers are signing on to the longer-term contracts, which means they’re buying into the technology road map for Microsoft products.”

Overall, Microsoft announced revenue of $18.06 billion for the fourth quarter, ended June 30, up from $17.4 billion in the same quarter last year. Loss per share was 6 cents.

Adjusting for the write-down and deferred-revenue items, Microsoft had fourth-quarter revenue and earnings per share at $18.60 billion and 73 cents, representing 7 percent and 6 percent increases, respectively, from the previous year.

(Net income for the quarter, not including the write-down, was about $5.8 billion. The company posted a profit of $5.9 billion the previous year.)

Wall Street analysts expected Microsoft to report earnings per share of 62 cents and revenue of $18.11 billion. Those estimates take into account the deferred revenue, but not the write-down.

For its fiscal year, Microsoft reported revenue of $73.7 billion, compared with $69.9 billion last year. It logged a net profit of $16.98 billion, down from $23.2 billion a year ago. Earnings per share was $2, down from $2.69 a year ago.

Wall Street analysts had expected Microsoft to report yearly revenue of $73.7 billion and earnings per share of $2.68.

Those estimates, too, take into account the deferred revenue from the Windows 8 upgrade but not the aQuantive write-down.

Microsoft had announced the $6.2 billion write-down earlier this month; the goodwill impairment was charged to its Online Services division.

In 2007, Microsoft acquired Seattle-based aQuantive, later selling off parts of it. Expectations for digital advertising that came with the purchase never panned out fully.

With the other accounting adjustment, Microsoft announced in June it would defer expected revenue of about $450 million to $550 million from a Windows 8 upgrade offer. The offer allows buyers of Windows 7 PCs who purchase the PCs from June 2 to Feb. 28, 2013, to upgrade to Windows 8 Pro for $14.99.

Overall, “we feel good about the results,” said Lisa Nelson, Microsoft’s director of investor relations. “Our results really reflect the strength and breadth of our businesses.”

Here’s how Microsoft’s divisions did:

* Windows & Windows Live (includes Internet Explorer): For the fourth quarter, revenue declined $598 million — or 13 percent — to $4.1 billion. Sales declined 3 percent for the full year to $18.4 billion.

Adjusting for the Windows upgrade offer, though, revenue declined just 1 percent for the quarter and 1 percent for the full year.

That decline, Microsoft executives said, was roughly in line with the PC market.

Businesses also helped boost this division, with Windows 7 running now on more than 50 percent of big businesses’ desktop PCs worldwide, Microsoft executives said.

The division logged $2.4 billion profit for the quarter and $11.5 billion profit for the fiscal year.

* Business (Office, SharePoint, Dynamics, Lync): Revenue increased $418 million — or 7 percent — to $6.3 billion for the quarter.

Sales reached $24 billion for the year.

The Business division accounted for Microsoft’s highest profit as well, with $4.1 billion e in the fourth quarter, and $15.7 billion for the fiscal year.

Exchange, SharePoint and Lync had double-digit growth rates in the fourth quarter, with the Lync unified communications offerings up 45 percent, executives said.

* Server and Tools (Windows Server, SQL Server, System Center, Azure): Revenue for the quarter rose 13 percent to $5.1 billion, driven primarily by multiyear licensing revenue.

Sales for the fiscal year reached $18.7 billion.

Profit was $2 billion for the quarter, compared with $1.7 billion a year ago. For the fiscal year, profit was $7.4 billion, compared with $6.2 billion in the 2011 fiscal year.

SQL Server played the largest role in the increase in multiyear licenses, and Microsoft executives said they expect to see that growth continue with the release of SQL Server 2012.

* Entertainment and Devices (Xbox, Kinect, Windows Phone, Skype): Revenue grew 20 percent to $1.8 billion this quarter.

Sales for the year reached $9.6 billion, up from $8.9 billion last fiscal year.

The division, though, ended up with a net loss of $263 million for the quarter, compared with net income of $13 million last year. For the fiscal year, the division made a profit of $364 million.

Though the Xbox holds 46 percent of the game-console market, Microsoft executives attributed the quarterly loss to the continued softening of that market.

* Online Services (Bing, MSN): Losses continued to accrue, though revenue did go up in the fourth quarter. Sales grew 8 percent to $735 million, up from $680 million in the same quarter last year.

Fiscal year-end revenue reached $2.9 billion, up from $2.6 billion in fiscal 2011.

But the division posted a loss of $6.7 billion for the quarter. That, however, includes the aQuantive write-down.

Without it, the division posted a loss of $479 million, narrower than the $745 million loss it logged a year earlier.

For the fiscal year, the division lost $8.1 billion, which includes the aQuantive write-down. Without the write-down, the loss was $1.9 billion, compared with a $2.7 billion loss at the end of the 2011 fiscal year.

Microsoft stock closed Thursday at $30.67, up 22 cents.

It rose more than 2 percent in after-hours trading — after the quarterly financial results were announced — to $31.32.



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