Microsoft Q4 Earnings: Company Posts First-Ever Quarterly Loss

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MICROSOFT FIRST LOSS
Microsoft said Thursday that an accounting adjustment to reflect a weak online ad business led to its first quarterly loss in its 26 years as a public company. (AP photo) | AP

LOS ANGELES, Calif. - Microsoft has posted its first quarterly loss in its 26 years as a public company as it declared a struggling online ad business a bust and prepared for one of the biggest product updates in its history.

The software company had warned two weeks ago that it would take a $6.2 billion charge in the April-June quarter because its 2007 purchase of online ad service aQuantive failed to help it compete with Google Inc. The amount reflected the bulk of the $6.3 billion it paid for aQuantive.

The purchase of aQuantive, Microsoft's most expensive deal at the time, was supposed to help Microsoft boost its online ad business and mount a more serious challenge to Google. But the division housing aQuantive continued to post losses — totalling more than $9 billion since the company bought aQuantive, not including the charge.

By contrast, Google has widened its lead in the growing online ad market, thanks in part to its purchase of DoubleClick for $3.2 billion about eight months after Microsoft took control of aQuantive.

Google's search engine, a major vehicle for selling ads, has remained strong, while Microsoft's Bing search engine saw its market share drop slightly to 26 per cent, from 27 per cent a year ago. The Bing figures include searches through business partner Yahoo Inc., which has been using Microsoft's search technology for nearly two years.

The aQuantive setback didn't faze investors, who have been used to years of troubles in Microsoft's online ad business. Investors usually focus on what lies ahead for a company instead of dwelling on past mistakes. Despite the loss, Microsoft's stock was up 72 cents, or 2.4 per cent, at $31.39 in after-hours trading following the announcement.

Microsoft's fortunes are now tied to the Oct. 26 release of Windows 8, the most extreme redesign of the company's flagship operating system since 1995. Windows 8 will feature a new look and boast new technology that will enable the operating system to work on touch-controlled tablet computers, as well as Microsoft's traditional stronghold of desktop and laptop computers. In conjunction with Windows 8, Microsoft is planning to release its own tablet, the Surface.

A revamped version of another lucrative franchise, Microsoft's Office software that bundles word processing, spreadsheet and email programs, is also in the works. Earlier this week, Microsoft previewed how the next version of Office will work on tablet computers running on Windows 8.

Microsoft, which is based in Redmond, Washington, has never previously reported a quarterly loss since the company went public in March 1986.

The $6.2 billion charge is a non-cash adjustment, which companies do when the value of their assets decline. Companies have to review their assets once a year, and the just-ended quarter is Microsoft's final one for fiscal 2012.

With the charge, Microsoft had a $492 million loss in the fiscal fourth quarter, or 6 cents a share. That compares with earnings of $5.9 billion, or 69 cents, a year ago.

Revenue rose 4 per cent to $18.06 billion.

Excluding the adjustment and the deferral of some revenue related to Windows 8, earnings came to 73 cents per share, beating the 62 cents per share expected by analysts polled by FactSet.

Although the earnings were higher than expected, analysts were looking for higher revenue at $18.15 billion.

With Windows 8-powered devices still a few months away, some prospective PC buyers have been postponing their purchases so they can buy the latest technology from Microsoft this fall. Microsoft said PC sales were flat in the just-ended quarter, and revenue in Microsoft's Windows division has now dropped in five of the past seven quarters.

The pressure won't be on Microsoft until Windows 8 is released in three months. Investors will then be closely watching to see if the new operating system delivers on its goal of making Microsoft a significant player in a tablet computer market dominated by Apple's iPad, while also helping boost PC sales.

The high hopes for Windows 8 are the main reason Microsoft's stock has climbed about 18 per cent this year as of Thursday's closing price of $30.67.

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