aQuantive Fiasco Hands Microsoft Its First Fiscal Loss

Microsoft reported its first loss in more than two decades Thursday as an accounting adjustment and low PC sales hurt the software maker’s numbers. However, the company remained optimistic that consumer demand will regain momentum when various upcoming products hit the market later this year.

Before the company released its quarterly earnings Thursday, it had already warned about a US$6.2 billion charge stemming from its 2007 purchase of online ad service aQuantive. The investment in the online ad market didn’t pay off nearly as much as Microsoft had hoped, the company said, as rival Google tightens its grip on Internet ads.

Overall, Microsoft brought in $18.06 billion on the quarter, up from $17.37 billion for the same time a year ago. It took a net loss of $492 million, or 6 cents per share, compared to a net income of $5.87 billion, or 69 cents per share, from last year. Without the $6.2 billion write-down, the company would have earned 67 cents per share, which would have come out ahead of Street expectations.

However, Microsoft is entering entering the “most exciting launch season in Microsoft history,” said CEO Steve Ballmer, with its new Windows 8 operating system and new mobile devices that run on an upgraded mobile OS set to hit shelves later this year.

Holding Out for Upgrade

Sales for Windows were down 13 percent on the quarter, reflecting a downturn in PC sales across the market. The company said numbers were also adjusted for a company offer that lets consumers buying a new PC that runs Windows 7 also buy a $14.99 upgrade to Windows 8 once the new OS launches.

“Microsoft gets about 80 percent of Windows revenue from sales of PCs with Windows preloaded,” Michael Silver, research vice president and distinguished analyst at Gartner, told the E-Commerce Times. “If PC sales are down, Windows sales will be down.”

As more consumers turn to mobile products such as smartphones and tablets, Microsoft’s competitors like Apple and Google have gained significant operating system market share with iPhones, iPads and Android devices. The software company is hoping that with the radical redesign of Windows 8, which is designed to also run on tablets, the company will gain a new following of Windows users.

It remains to be seen how much excitement Windows 8 will generate, but Colin Gillis, analyst at BGC Partners, said the company is likely to get at least some type of boost from the product launch.

“It’s still early, but we’ll see what kind of acceleration it gets from Windows 8,” he told the E-Commerce Times

In It for the Long Haul

But before the company can measure whether or not Windows 8 is going to speed up sales, Microsoft can concentrate on its relatively significant sales in the current PC space, said Gillis.

“You can look at the stalled PC growth in two ways,” he said. “On the one hand, it is stalled, and clearly the landscape is changing as people use tablets more. But Microsoft is still selling millions of PCs, and that is certainly not indicative of a failing company.”

The more important part of the picture, said Gillis, is the company’s ability to sign on loyal consumers, especially in the enterprise space. Demand for products and services at Microsoft grew this quarter, with multi-year licensing revenue up 14 percent from a year ago. The space brought in record unearned revenue balance of $20.1 billion, up 17 percent from last year.

In a tech space where evolving new markets can make company longevity a challenge, Microsoft’s ability to sell long-term contracts is a huge advantage, said Gillis.

“Signing on a multi-year contract, where a company is essentially saying they’re locking in with Microsoft, that’s an important part of the story,” he said.

With Microsoft’s upcoming offerings, it’s possible it will be more than just enterprise customers looking to purchase from the company’s product line, said Gillis.

“You could argue Microsoft even has one of the most exciting product line-ups,” he said. “Windows 8 is coming out, the Surface will be interesting to watch, SkyDrive does well, Skype does well, and they’ve got a lot going on. There is a lot to the story besides just consumer PC sales being weak.”

Microsoft did not respond to our request for further details.