News

Microsoft's $60B Year-End Revenue Dogged by Search Costs

Microsoft's fiscal fourth-quarter and 2008 year-end financial results were announced in a Webcast on Thursday.

• By Kurt Mackie
• 07/18/2008

Those expenses -- operating losses of $488 million for the fourth quarter and $1.23 billion for the year -- represent Microsoft's ongoing efforts to chase after the online advertising space. The company currently trails badly behind Google and Yahoo in search market share and search ad revenue.

Revenues Show Increase
Still, the company seems to have oodles of money to spare. Microsoft's fiscal 4Q revenue result was $15.84 billion, which is up 18 percent when compared with the same quarter's revenue last year. The year-end revenue figure, at $60.42 billion, represents a similar 18 percent increase.

Microsoft pegged its diluted earnings per share for the quarter at $0.46, up 48 percent compared with 4Q 2007. The year-end diluted earnings per share figure was $1.87, up 32 percent from the previous year.

The Yahoo Deal
The Yahoo question was something everyone had ears for, and Chris Liddell, Microsoft's senior vice president and chief financial officer, didn't disappoint. Microsoft is currently pursuing an unsolicited bid to buy Yahoo's search business.

Liddell assured that Microsoft planned "no changes to Yahoo's governance" under the proposed deal -- something that no doubt had spooked Yahoo's management earlier under bungled negotiations with corporate raider Carl Icahn. Yahoo will face a proxy board fight on August 1 from Icahn, and that fact can't have helped the negotiations.

Liddell gave grueling specifics on Microsoft's current bid for Yahoo's search business, although Yahoo apparently spurned such a deal earlier this week.

"Firstly, we are providing significant revenue guarantees," Liddell said of the proposed Yahoo search acquisition. "Microsoft proposed a 10-year minimum revenue guarantee totaling between $19.5 and $26.5 billion dollars. For the first five years, the guarantee is $2.3 billion per year. There afterwards, both Yahoo and Microsoft have the option to extend the agreement for an additional five-year period. If Yahoo unilaterally chooses to extend the agreement, the guarantee would be for $1.6 billion dollars per year after the extension. Conversely, if Microsoft unilaterally chooses to extend the agreement, the guarantee to Yahoo would be $3 billion dollars per year after the extension. These guarantees are not conditional on Yahoo's search queries. Rather, the guarantees are tied to Yahoo's home page performance."

If that wasn't clear enough, Liddell expounded on the proposal.

"Microsoft would pay Yahoo $1 billion for its search assets, provide $2.8 billion dollars of senior debt to Yahoo on favorable terms, and make a significant equity investment in Yahoo through the purchase of $3.9 billion dollars of Yahoo stock at $19.50 per share, reflecting our view of the value of the company as a result of our proposed transaction and the distribution of cash, and the Yahoo Asian investments by Yahoo to its stockholders," Liddell said.

Liddell had also discussed how Yahoo's rejection of Microsoft's various offers over the last six month or so had caused Microsoft to accelerate its "online services organic growth strategy," with investments in search and ad platform technologies.

"We believe that the additional investments -- several hundreds of millions of dollars -- is worth the short-term costs given the opportunity to participate in a market where the opportunity is measured in the tens of billions of dollars," he said.

Quarterly Highlights
Supplementing the hard numbers were a few nuggets of company information delivered by Colleen Healy, Microsoft's general manager for investor relations. She described this fourth-quarter performance as Microsoft's "fastest growing fourth quarter since 1999."

Healy gave an estimated arrival time for SQL Server 2008, which she said is targeted for release on or during the first quarter of fiscal-year 2009.

She also disclosed a figure for Windows Vista licensing, saying that "during the quarter, we surpassed the 180 million mark for Windows Vista licenses sold today."

Healy noted that SharePoint revenue was "up over 30 percent" and that "Dynamics grew 22 percent" during the quarter. Highlights for the Microsoft Business Division included the launch of both Microsoft Dynamics AX 2009 and Dynamics CRM Online products, she said.

For a link to the report showing Microsoft's fiscal fourth-quarter and 2008 financial results, go here.