Microsoft online business flags despite overall revenue rise

Revenues up 18% year over year

Microsoft Corp.'s revenue rose 18% for both its fiscal 2008 fourth quarter and for the year, but the company's Online Services Business (OSB), under scrutiny because of heated negotiations to purchase Yahoo Inc.'s search business, faltered.

Microsoft today reported revenue of $15.84 billion for the quarter that ended June 30, an 18% increase over the $13.37 billion in revenue reported for the same period last year. Revenue was slightly ahead of analyst quarterly estimates of $15.65 billion.

Earnings for the quarter were $5.68 billion or 46 cents per share, slightly less than median estimates from Thomson Financial analysts, who predicted Microsoft would earn 47 cents a share for the quarter.

For the fiscal year that also ended June 30, Microsoft reported revenue of $60.42 billion, also an 18% increase over the prior year. Revenue again was a hair ahead of analyst estimates, which expected Microsoft to earn $60.24 billion for the year.

While overall the company is performing well, Microsoft's online business remains a blemish in the company's financial statement.

The OSB reported revenue of $838 million for the quarter, up slightly from $677 million for the same time period last year, but the segment took a $488 million loss in operating income for the fourth quarter, more than double the $210 million operating loss the division saw last year.

For the year, the OSB lost $1.23 billion in operating income. In fiscal 2007, the business reported a $617 million loss in operating income.

In a conference call that Microsoft held to discuss the financial results, Colleen Healy, the vendor's general manager of investor relations, said the OSB's counts of search queries and page views grew during the fiscal year. Microsoft also increased the number of advertisers using is online ad platform by 28% in fiscal 2008, Healy said.

But she added that efforts to monetize the increases "lagged" because of tightened advertising budgets and competitive pricing for online ads.

Microsoft has tried unsuccessfully since February to bolster OSB by purchasing Yahoo. Relations between the two companies have become increasingly heated of late, as Microsoft has teamed with investor Carl Icahn in a bid to replace Yahoo's board with those favorable to a deal.

Microsoft also has sought to purchase only Yahoo's search business, a bid Yahoo's management team has blocked. Microsoft is reportedly in talks with AOL LLC to purchase that business as another option to boost online revenue.

In a statement, Microsoft attributed its strong quarter and fiscal year to the customer demand for all of its products, including Windows Vista, for which the company has sold 180 million licenses in about a year and a half.

However, some of those licenses are to customers that purchased Vista but then downgraded to XP, customers and analysts have said.

Microsoft also said the launch of Windows Server 2008, SQL Server 2008 and Visual Studio 2008 in February, and strong sales of Office 2007 and the Xbox 360 game console, contributed positively to the financial results.

Chris Liddell, Microsoft's chief financial officer, said during the conference call that company officials were disappointed that its falling stock price didn't reflect what he described as the positive nature of its financial results.

Liddell, though, acknowledged that "uncertainty over the outcome of the Yahoo discussions" was having an effect on Microsoft's stock price. He added that the company continues to focus "on the factors that remain in our control."

Copyright © 2008 IDG Communications, Inc.

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