Microsoft Shows First-Ever Loss

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Microsoft’s revenue grew in the fiscal fourth quarter, but a writedown on its aQuantive acquisition and a Windows 8 hobbled profits

Microsoft saw revenue grow in its fiscal fourth quarter by 4 percent, but the software giant swung to its first ever loss due to the write down from its troubled aQuantive acquisition five years ago and deferred revenue related to its Windows 8 upgrade programme.

Microsoft officials announced earlier this month that it was taking a $6.2 billion (£4bn) write down from its aQuantive deal in 2007, when the software giant paid $6.3 billion in hopes of boosting online advertising revenue. At the same time, the company announced on 19 July that it was deferring another $540 million in revenue in Windows 8 revenue because of an offer it’s giving users.

Essentially, customers that buy a PC running Windows 7 now can pay $14.99 in October to upgrade to Windows 8.

October launch

Microsoft executives had said that the much-anticipated Windows 8 would be released sometime in October, and Microsoft CFO Peter Klein told analysts and journalists during a conference call July 19 that the new operating system will be generally available on 26 October.

The aQuantive write off and deferred revenue put a cloud over what otherwise was a strong quarter for the Microsoft. For the quarter, the company saw $18.06 billion in revenue, but –up from $17.37 billion a year ago – but lost $492 million. During the same period last year, Microsoft had $5.87 billion in income.

The loss come as Microsoft prepares for what Klein called the “largest launch wave in our history”. In the company’s fiscal year 2013, the company not only will roll out Windows 8, but also Windows RT – the version of Windows 8 for systems running ARM Holdings’ system-on-a-chip (SoC) architecture – Windows Phone 8 mobile OS, Windows Server 2012 and a new version of its Office software.

For the quarter, Microsoft showed strong revenue gains in its core products, particularly among corporate customers. Its Office software revenue grew 7 percent, with Klein noting the continued strength of Windows 7 even two years after its release.

More than 50 percent of enterprise desktops are running Windows 7, and Microsoft is seeing strong attach rates from enterprise customers, who are looking for packages of software and services around the OS.

Multiyear licences

In addition, Klein said, businesses are increasingly opting for multiyear licences in Windows, Office, database and other enterprise software, which he attributed to corporate interest the Microsoft roadmap. Those multiyear deals earned Microsoft $20.1 billion in unearned revenue – a 17 percent jump from the previous fiscal year – which analysts said was a good indicator of future sales.

The company’s servers and tools business also had a good fiscal year, generating $7.4 billion in income, according to officials.

While Microsoft’s traditional enterprise businesses continued to see strong sales, the company is still making its way in the online world. The write down from ill-fated aQuantive deal is an indication that the company is continuing to try to find its footing, particularly in search, where its Bing engine trails Google.

It has seen some movement. Experian Hitwise reported that Google’s share of the search market dropped 3 percent in May, to 65 percent, while Bing’s jumped 5 percent, to 28.1 percent, compared with the same month last year. Similar surveys show Bing making some inroads, although it remains a distant number two to Google.

Klein called web search a “strategic asset” for the company, noting that revenue for the company’s online division jumped 8 percent in the quarter.

Mobile market

Like other major tech players, such as Intel, Advanced Micro Devices, Hewlett-Packard and Dell, Microsoft is seeing some weakness in PC sales and is looking to gain greater traction in the mobile space. Executives expect Windows 8 – which is optimised for tablets – to help the software company become a player in the space, which is now dominated by Apple’s iPad and devices running Google’s Android mobile OS.

Microsoft also this month showed off its Surface tablet, which will run Windows 8 and be powered by an ARM chip.

Windows Phone 8 will help fuel the trend toward “smart mobile devices”, Klein said. He noted that the number of devices running Windows Phone grew by more than 50 percent between the third and fourth fiscal quarters.

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