Microsoft online business flags despite overall revenue rise

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Microsoft's revenue rose 18 percent for both its fiscal 2008 fourth quarter and year, but the company's Online Services Business (OSB), under scrutiny due to heated negotiations to purchase Yahoo's search business, continues to falter.

Microsoft on Thursday revealed revenue of US$15.84 billion for the quarter that ended June 30, an 18 percent 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 $0.46 per share, slightly less than median estimate from Thomson Financial analysts, who predicted Microsoft would earn $0.47 for the quarter.

For the fiscal year that also ended June 30, Microsoft reported revenue of $60.42 billion, also an 18 percent 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.

Microsoft's 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, 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 to discuss the results, Microsoft's Colleen Healy, general manager of investor relations, said search queries and page views for OSB grew in the year, though monetization "lagged" due to tightening advertising budgets and the competitive price of display advertising.

Microsoft grew the number of advertisers using its ad platform by 28 percent in fiscal 2008, she added.

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 to purchase that business as another option to boost online revenue.

In a press 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.

Despite strong results, Microsoft shares were down in after-hours trading, falling nearly 6 percent from $27.57 at close to $25.88.

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 reported Thursday.

Microsoft CFO Chris Liddell said during the earnings call that the company was disappointed that its falling share price did not reflect its positive financial results.

He acknowledged the effect of "uncertainty over the outcome of the Yahoo discussions" on Microsoft's share price, and said it remains "focused on the factors that remain in our control."

The Microsoft Business Division, home to the Office productivity suite, fared best for the quarter and the year, followed by its Client business, which oversees Windows Vista.

Revenue from the Business segment in the fourth quarter was $5.26 billion, up from $3.81 billion in the same period last year. For the full year the division earned revenue of $18.93 billion, compared to $16.4 billion in fiscal 2007.

Revenue from Microsoft's Client business in the fourth quarter was $4.37 billion, compared to $3.81 billion last year. Full-year revenue was $16.86 billion, compared to $14.98 billion last year.

Microsoft's revenue grew 15 percent in the U.S., 16 percent in what it considers "mature" markets, and 35 percent in emerging markets, a segment Microsoft has been pursuing aggressively.

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