Since it first hit the public market back in 1986, Microsoft has prided itself on the fact that it has never suffered a quarterly loss, until now that is. Late last week the Redmond Company posted a loss of almost $500 million in its earnings report for its fourth fiscal quarter, which translates to a drop of about 6 cents per share.
While the quarterly loss ends Microsoft’s respectable streak of earnings consistency, the setback wasn’t a surprise, as the company had announced earlier this month that it would take a $6.2 billion hit on a write-down it made on its struggling online unit.
In fact, no only was the quarterly loss expected, it wasn’t actually as bad as the market thought it would be, as Microsoft still managed to exceed Wall Street’s predictions on its quarterly results. This means that while some no doubt see this as a slip from one of the world’s largest software companies, there are many that simply see it as the cost of evolution in an ever-changing market, confident that Microsoft will firmly establish itself as a primary mobile competitor with the impending release of Windows Phone 8.
For those of us not versed in market speak—myself included—the explanation behind Microsoft’s quarterly loss is relatively simple, its online division was overvalued.
The company’s Internet unit, which includes the Bing search engine business and MSN Web portal, has struggled for years, crippled by an ill-advised acquisition of a digital advertising firm several years ago. The company’s quarterly loss of $492 million reflected a $6.19 billion write-down (re-valuation) of this online division, giving you some sense of just how well the company would have down if it hadn’t been included.
In addition the write-down, Microsoft also announced that its earnings report would be affected by a deferred rebate program. In light of the impending release of the much much-ballyhooed next iteration of the company’s Windows franchise, Windows 8 (slated for release later this year) the company deferred $500 million of its Windows revenues to an upgrade program, allowing users who purchase a PC now to upgrade to W8 for free.
That said, without the multi-million dollar write-down pulling the company into the red for the quarter, but including the company’s loss due to deferred revenue, things don’t actually look that bad, with Microsoft posting a 67 cent increase per share, beating out Wall Street’s estimation of growth of only 62 cents per share.
In the end, such hiccups happen to companies, and while it’s unfortunate that Microsoft ruined its 26 year run of no quarterly losses, don’t look for this to stall any of the momentum that the release of Windows 8 (and Windows Phone 8) is generating.