The Red and Green Health of Microsoft
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Microsoft (NASDAQ: MSFT) came out with its fiscal 2012 earnings and the results were more or less in tune with the expectations. The company has been in a lot of news lately thanks to the activities related to its latest platform offerings and also for the next-generation Surface tablets. Though the company reported strong top line growth, the bottom line was in the red. Let’s look at what actually happened here.
A look at numbers
In a way, the quarter was an unusual one for Microsoft as the company reported a loss for the first time since it went public in 1986. Microsoft reported total revenue of $18.06 billion and a net loss of $492 million or $0.06 per share. Though the top line surged 4% from the year ago period, the bottom line was in the red due to a $6.2 billion goodwill impairment and $540 million of deferred revenue related to the Windows 8 Upgrade offer. Including the deferred revenue and excluding the goodwill impairment, Microsoft has done pretty well with total revenue of $18.6 billion and an EPS of $0.73. For the full year 2012, the company generated $73.72 billion of revenue and an EPS of $2.00.
A deeper look into the quarter
Now that we know what made Microsoft create this not so welcoming history, let’s dig deep into it. In 2007, Microsoft had acquired aQuantive, an online ad agency, for $6.3 billion with the intention of catching up with Google’s (NASDAQ: GOOG) ad business. However, this investment did not turn out that well and now when the value of the asset declined, Microsoft had to write it down for $6.2 billion resulting in the goodwill impairment which pulled down the otherwise strong bottom line.
The weak PC demand also took its toll on Microsoft’s top line. This was the seventh consecutive quarter when the company witnessed disappointing PC shipments. Consumers are holding off their purchases in anticipation of the release of Windows 8. It seems, Microsoft alone is not facing this weakness. According to a the technology research firm Gartner, the demand for PCs worldwide remained flat during the quarter and things were worse for the US as the demand plunged by 5.7% from the prior year period.
However, the effects of this impairment and the weak demand were offset nominally by the deferred revenue. Recently, Microsoft came out with the Windows 8 Upgrade offer which will enable users to upgrade their new Windows 7 PCs to Windows 8 at a nominal cost of $14.99, the condition being the new PCs should be bought between 2nd June, 2012 and 31st January, 2013. As a result of this move, Microsoft recognized deferred revenue of $540 million.
What else is going on?
The write down of aQuantive might not be the only blow for Microsoft. The company might face a situation where it will have to part with $7 billion as a fine for violating a 2009 agreement with the European Commission (EC). In the agreement Microsoft had agreed to give every user the option to choose their default browser through a browser choice screen while installing the operating system, so that users can use other browsers such as Google’s Chrome or Mozilla Firefox and thus avoid using Internet Explorer if they wish to.
In the latest report submitted to the EC, the company mentioned that all users were getting the browser choice screen though that was not the true picture. Now, when the EU got updated about the situation it decided to file a lawsuit against Microsoft. Microsoft claims this miss as a technical error which they fixed after discovering the problem very recently.
The most exciting launch season
According to Steve Ballmer, Microsoft CEO, the company is approaching the most exciting launch season in the history of Microsoft. The company is making substantial progress related to the development and launch of the Windows 8 and its younger sibling Windows Phone 8. The company also has plans to launch its latest Office as well as Windows Server. With so much going on, no doubt Ballmer is excited. Its range of Surface tablet computers are expected to provide stiff competition to Apple’s (NASDAQ: AAPL) iPad and Samsung’s tablets. Eying the forthcoming holiday season, Microsoft is ready to set the floor on fire.
All’s well that ends well
Everything seems nice and healthy for the PC maker. But one question which can’t be ignored is what’s the point of being healthy and posting good revenue growth if the company finally reports losses. Though this loss is only in the books and not in actual cash, it will still have a negative impact on the stock. Though the company is making all the correct moves when it comes to its operations and revenue generation, wrong moves related to yieldless acquisitions and the potential violation of rules and agreements is sure to be detrimental to Microsoft’s health.
The point of relief is that the solution lies in the hands of the company only. If it can put a check on these useless losses and make the best out of “the most exciting launch season,” it will have a glorious time. The present weak demand will also prove to be beneficial for the company. The consumers are delaying their purchase decisions and vendors are not buying new machines and are trying to clear their inventories. So, by the time Windows 8 appears, the market will be totally ready to accept the new platform and Microsoft will be showered with orders.
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