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Microsoft loss masks rising fortunes

Microsoft reported its first ever quarterly loss today but record revenues tell a different story about the rising fortune of the company written off by many, suggests ARTHUR GOLDSTUCK.

Microsoft today announced its first ever quarterly loss but it was a result of an accounting adjustment rather than flagging business. The truth behind the loss is that the company also achieved record revenues. Taking accounting adjustments into account, it also achieved an all-time record profit in the last quarter.

Thanks to writing off their investment in online advertising service aQuantive to the tune of $6.19bn, Microsoft posted a $492m loss in their fiscal fourth quarter. For the same period a year ago, it achieved profits of $5.9bn. Excluding the write-down of aQuantive, profits would have been almost exactly the same as a year ago. Removing other accounting adjustments, the company would have reported 12% increase in profits to $6.9bn.

The significance of this lies in the fact that the market has been marking time on Microsoft as it awaits the launch of Windows 8 in October. The market-dominance of Office also meant that Office 2010 sales would have slowed ahead of the announcement of the new version of Office last week.

Given its high real profits and record revenues in the past quarter, it is clear that the company is not only solidly positioned for a leap in profit and revenue, but retains a powerful hold on its market outside of tablets and phones and peripheral ventures like advertising. The launch of the new Office this quarter and Windows 8 next quarter indicates that the company is on a dramatically upward trajectory over the next year.

While a once-off glance suggests Windows is in trouble revenue down 13% for the quarter and 3% for the year that should come as no surprise considering the likelihood that Windows 7 and Office 2010 sales would have stalled leading up to the release of new versions.

The one core weakness in the Microsoft offering is its low market share in smartphone and tablet operating systems. Should it invest too heavily in its own hardware, rather than focus on the needs of its manufacturing partners, this could inflict further damage.

The following information is provided by Microsoft:

Microsoft has announced record quarterly revenue of $18.06 billion for the quarter ended June 30, 2012. Operating income and loss per share for the quarter were $192 million and $0.06 per share.

The financial results reflect a previously announced non-cash, non-tax-deductible income statement charge of $6.19 billion for the impairment of goodwill on the aQuantive acquisition, and the deferral of $540 million of revenue related to a Windows Upgrade Offer.

Adjusting for these items, non-GAAP fourth quarter revenue, operating income, and earnings per share were $18.60 billion, $6.93 billion, and $0.73 per share, which represented increases of 7%, 12%, and 6%, respectively, over the prior year period.

‚”We delivered record fourth quarter and annual revenue, and we’re fast approaching the most exciting launch season in Microsoft history,‚” said Steve Ballmer, chief executive officer of Microsoft. ‚”Over the coming year, we’ll release the next versions of Windows, Office, Windows Server, Windows Phone, and many other products and services that will drive our business forward and provide unprecedented opportunity to our customers and partners.‚”

‚”The combination of solid revenue growth and rigorous cost discipline drove double-digit operating income growth for the quarter, adjusting for the goodwill impairment and deferred revenue,‚” said Peter Klein, chief financial officer of Microsoft. ‚”We are focusing our resources in strategic areas that will deliver shareholder value and long-term growth opportunities.‚”

For Microsoft’s fiscal year 2012, the company’s revenue, operating income, and earnings per share were $73.72 billion, $21.76 billion, and $2.00 per share. Adjusting for the goodwill impairment charge and deferred revenue, non-GAAP fiscal year 2012 revenue, operating income, and earnings per share were $74.26 billion, $28.50 billion, and $2.78 per share, which represented increases of 6%, 5%, and 5%, respectively, over adjusted non-GAAP fiscal year 2011 figures.

The Server & Tools business revenue grew 13% for the fourth quarter and 12% for the full year. Enterprises are purchasing SQL Server and System Center to support their mission critical workloads and build their business intelligence and private cloud infrastructure. Windows Server 2012 will be available this September.

The Microsoft Business Division revenue grew 7% for the fourth quarter and 7% for the full year reflecting continued momentum in Office 2010 sales. Office is now installed on more than 1 billion PCs around the world. Earlier this week, we announced the customer preview of the new Microsoft Office.

The Windows & Windows Live Division revenue declined 13% for the fourth quarter and 3% for the full year. Adjusting for the impact of the Windows Upgrade Offer, Windows Division non-GAAP revenue declined 1% for the fourth quarter and 1% for the full year. Windows 7 adoption continued with more than 50% of worldwide enterprise desktops now running Windows 7. The next version of Windows will release to manufacturing this August and will become generally available October 26, 2012.

The Online Services Division revenue grew 8% for the fourth quarter and 10% for the full year reflecting growth in our search business. Bing organic U.S. search market share was 15.6% for the month of June 2012, up 120 points from the prior year period.

The Entertainment and Devices Division revenue grew 20% for the fourth quarter and 8% for the full year primarily reflecting the addition of Skype. Xbox has now been the top-selling console in the U.S. for 18 consecutive months. During the year, Xbox launched new television and video partnerships for Xbox LIVE, and announced Xbox SmartGlass, which connects phones, PCs, and tablets with the Xbox 360 console to enable more interactive and engaging entertainment.

* Follow Arthur on Twitter on @art2gee

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