Don’t Believe the Doomsayers: Microsoft’s Q4 Results Are Good News

Despite notching its first-ever quarterly loss, Microsoft’s fourth-quarter results beat analyst expectations, giving the software giant some breathing room as it heads into a year of major change.

The loss comes due to a $6.2 billion write-down for one of its acquisitions in early July and a deferral of $540 million of revenue related to the Windows Upgrade Offer. But with strong operating profits, the software giant still beat analyst expectations after adjusting for the one-time hits.

Adjusted earnings came in at 73 cents per share on revenue of $18.6 billion. Wall Street observers were expecting an average EPS of 62 cents on $18.13 billion in revenue.

The non-adjusted numbers for the quarter show a loss of six cents per share and revenue of $18.1 billion, but even with the write-down Microsoft made earlier this month to adjust for the weaker than expected growth of its 2007 aQuantive acquisition, Microsoft still reflected 4% growth in Q4 revenue year to year. Adjust for the goodwill charge and deferrals, and the company enjoyed 7% year-to-year growth.

Microsoft has a potentially big year ahead with the release of Windows 8, Office 2013 and presumably the next version of SharePoint. That’s a lot of cash to be raked in, especially given the strong numbers coming in from Windows 7 (50% of Windows desktops reporting Windows 7 deployed).

Trouble in PC Land?

But there was a small sign of potentially big change ahead for the company: While sales of business Windows PCs were up by 1%, consumer PC sales fell 2% in the quarter, according to remarks made by Bill Koefoed, general manager of investor relations, on the earnings call Thursday. Continuing declines in consumer PC sales present a huge challenge for Microsoft.

That could put the company’s Windows 8 bet on shakier ground; the new operating system’s Metro interface may not appeal to business IT managers or end-users, who may prefer a more traditional interface to avoid migration and training costs and headaches.

And Microsoft is ready for this to happen. “We expect the current dynamics for the PC market to continue into the first quarter of 2013,” said CFO Peter Klein. Klein added that he expected Windows sales to lag the PC market in the first quarter, due to the usual slowdown prior to a Windows upgrade, but then pick up in subsequent quarters and outpace PC sales.

In this quarter, growth was absent in the Windows and Windows Live division, where that $540 million deferral was tacked on to cover the Windows Upgrade Offer the company announced this quarter. The offer gives consumers who buy qualifying Windows 7 PCs the option to purchase a downloadable upgrade to Windows 8 Pro for an estimated retail price of $14.99 during the promotion period, and Microsoft wants to make sure it can foot the bill for the offer. There will be anywhere from a $1 billion to $1.2 billion referral charge for the same reason in the first quarter of fiscal 2013, Koefoed said.

Skype Powers Growth

Skype seems to have played a big role in helping the Entertainment and Devices division, where quarterly revenue grew 20% to $1.779 billion. That sharp increase in revenue helped offset the additional staff costs for the Skype acquisition as well as payments Microsoft made to Nokia “related to joint strategic initiatives,” according to the 8-K report filed with the SEC. But the division still posted a $263 million quarterly operating loss. Given the advance interest for the Microsoft Surface device and continued strong Xbox performance, this division is expected to continue to pay back big for Redmond.

The Business division, which grew revenue 7% this quarter to $6.291 billion, just saw an acquisition of its own: The $1.2 billion buyout of Yammer was finalized Thursday, less than a month after it was announced. And this group posted a whopping $4.1 billion in operating revenue, up from $3.761 billion in the same quarter last year.

So despite the scary-looking quarterly loss, the reality is that Microsoft has closed out its 2012 fiscal year strong, and remains on solid financial footing. Given the big changes coming in 2013, that footing will be critical.