Microsoft Q4 2012 by the numbers: $6.2B charge saps record quarter

Microsoft closed its fiscal year in relatively good shape, despite globally slow PC sales that weighed down Windows division sales and product transition period that affected some others. The Redmond, Wash.-based company has a heap load of new products in queue for the next three quarters, causing some customers to delay purchases.

However, a one-time $6.19 billion impairment goodwill charge, related to the Online Services Business, and $540 million deferral led Microsoft to post a 6 cents-per-share loss -- or $492 million, after taxes. The deferral covers upgrade guarantees related to Windows 8's launch.

Adjusting for these items, for fiscal 2012 fourth quarter, ended June 30, Microsoft's revenue rose 7 percent to $18.6 billion, year over year. Operating income: $6.93 billion, or 12 percent increase. Net income rose 30 percent to $5.87 billion, or 73 cents a share. Earnings per share rose by 6 percent year over year. Microsoft announced fourth quarterly and yearly results after the market closed today.

Average consensus was $18.13 billion revenue and 58 cents earnings per share, for the quarter. Revenue estimates ranged from $17.59 billion to $18.63 billion, with estimated year-over-year growth of 4.4 percent.

For fiscal 2012, ended June 30, Microsoft's actual revenue was $73.72 billion, operating income $21.76 billion, and earnings per share $2. Adjusting for the charges, revenue rose 6 percent to $74.26 billion, year over year. Operating income: $28.5 billion, or 5 percent increase. Net income rose 23 percent to $23.15 billion, or $2.78 a share. Earnings per share rose by 5 percent year over year.

Average consensus was $73.78 billion revenue and $2.64 earnings per share, for the year. Revenue estimates ranged from $73.26 billion to $74.29 billion, with estimated year-over-year growth of 5.5 percent.

"We delivered record fourth quarter and annual revenue, and we’re fast approaching the most exciting launch season in Microsoft history", Microsoft CEO Steve Ballmer says. "Over the coming year, we’ll release the next versions of Windows, Office, Windows Server, Windows Phone, and many other products and services that will drive our business forward and provide unprecedented opportunity to our customers and partners".

Q4 2012 Revenue by Division

• Windows & Windows Live: $4.15 billion, down from $4.74 billion a year earlier.
• Server & Tools: $5.09 billion, up from $4.64  billion a year earlier.
• Business: $6.3 billion, up from $5.87 billion a year earlier.
• Online Services Business: $735 million, up from $680 million a year earlier.
• Entertainment & Devices: $1.78 billion, up from $1.49 billion a year earlier.

PC Crisis

For the seventh quarter in a row PC shipments hung like a shadow over Microsoft results, exacerbated by customers holding off purchases in anticipation of Windows 8's release. The operating system launches October 26, but volume-license subscribers can get it next month.

A week ago, Gartner and IDC reported weaker-than-expected PC shipments during second calendar quarter, which coincides with Microsoft's fourth fiscal quarter. The overall global PC market was flat year over year, according to both analyst firms. By comparison, US PC shipments were disastrous, falling 5.7 percent year over year, according to Gartner, and declining 10.6 percent by IDC's reckoning.

Falling shipments isn't necessarily bad. "Consumers are delaying purchases, and vendors and retailers are slowing down their PC activities to clear existing inventories", David Doud, IDC research director, says. "The situation is exacerbated by consumer notebook saturation, a slowing replacement cycle in the commercial sector, and the big macro-economic and political events affecting confidence and spending".

Q4 2012 Income by Division

• Windows & Windows Live: $2.34 billion, down from $2.94 billion a year earlier.
• Server & Tools: $2.1 billion, up from $1.69 billion a year earlier.
• Business: $4.1 billion, up from $3.76 billion a year earlier.
• Online Services Business: Loss of $6.67 billion, up from $745 million loss a year earlier.
• Entertainment & Devices: $263 million, down from $13 million profit a year earlier.

But there also is increasing tablet competition, particularly iPad. "Consumers are less interested in spending on PCs as [they] are other technology product and services, such as the latest smartphones and media tablets that they are purchasing", Mikako Kitagawa, Gartner principal analyst, says. "In the second quarter of 2012, the PC market suffered through its seventh consecutive quarter of flat to single-digit growth", Kitagawa says.  Coincidentally, or not, iPad launched eight quarters earlier.

IDC analysts are optimistic Windows 8 will pull the PC market back from the brink. "The announcement of a Windows 8 launch date, as well as broader communication of new features in the OS, are key steps that would help to address uncertainty about new product availability and help consumers and channels plan their purchases", Jay Chou, IDC senior research analyst, says. With respect to iPad competition, much depends on how Microsoft prices Surface, which may be the only Windows RT tablet that can compete with iPad on price.

Breakdown by Division

Microsoft reports revenue and earnings results for five divisons: Windows & Windows Live, Server & Tools, Business, Online Services and Entertainment & Devices.

Windows & Windows Live. Slow PC shipments sapped the Windows & Windows Live division yet again, with revenue down 13 percent during the quarter and down by 3 percent for the year. However, when removing the $540 million deferral, revenue fell but 1 percent for the quarter and year. Operating income fell by 18 percent, or $511 million, in part because of the deferral.

Windows sales to businesses grew by 1 percent year over year, while those to consumers declined by 2 percent. Microsoft's estimates for year-over-year PC shipments are in line with analysts: flat.

More than half of enterprise desktops have Windows 7.

Looking ahead to fiscal first quarter, Microsoft expects to defer $1 billion to $1.2 billion related to OEM presales and the $39.99 upgrade offer.

Fiscal 2012 Revenue by Division

• Windows & Windows Live: $18.34 billion, down from $19.03 billion a year earlier.
• Server & Tools: $18.69 billion, up from $16.69  billion a year earlier.
• Business: $24 billion, up from $22.5 billion a year earlier.
• Online Services Business: $2.87 billion, up from $2.6 billion a year earlier.
• Entertainment & Devices: $9.6 billion, up from $8.9 billion a year earlier.

Server & Tools. Revenue rose about 13 percent ($568 million) year over year. The division is insulated against economic maladies, because about 60 percent of revenues come from contractual volume-licensing agreements. A 22-percent in these licenses fueled overall growth. Operating income rose 24 percent, or by $409 million.

"Product revenue increased $431 million or 12 percent, driven primarily by growth in SQL Server and System Center.", according to Microsoft financial statements.

Looking ahead to fiscal first quarter, Microsoft expects transactional sales to lag the hardware market -- not surprising given Windows Server 2012's launch (resulting in delayed purchases). Annuity license sales will grow in the low teens.

Business. The division was the quarter's big overall performer (again), with revenue up 7 percent year over year and operating income up 9 percent -- that's by $418 million and $339 million, respectively. Revenue topped a stunning $6.3 billion. However, consumer sales fell 4 percent, or by $37 million. The same PC market malaise affecting consumer Windows also sapped consumer Office.

Lync revenue by 45 percent and Dynamics CRM by 25 percent, bring subscribers to 2.7 million.

Looking ahead to fiscal first quarter, Microsoft expects transactional sales to lag the hardware market, which in part reflects slow down ahead of Office 2013's release. Annuity licenses will grow in the low teens.

Fiscal 2012 Income by Division

• Windows & Windows Live: $11.46 billion, down from $12.2 billion a year earlier.
• Server & Tools: $7.4 billion, up from $6.3 billion a year earlier.
• Business: $15.72 billion, up from $14.66 billion a year earlier.
• Online Services Business: Loss of $8.1 billion, down from $2.56 billion loss a year earlier.
• Entertainment & Devices: $364 million, down from $1.26 billion loss a year earlier.

Online Services Business. Search and display ads drove up online advertising revenue by 8 percent, or by $55 million. The division posted a hugely operating loss -- $5.67 billion -- largely because of Microsoft's $6.19 billion write-off related to the 2007 aQuantive acquisition.

Entertainment & Devices.The division's revenue increased a healthy 20 percent year over year, or $292, largely from recently acquired Skype. Microsoft shipped 1.1 million Xboxes during the quarter, down 39 percent from 1.7 million a year earlier. Meanwhile, Xbox Live memberships rose 15 percent.

Windows Phone units rose 50 percent quarter on quarter. Skype calls rose by 50 percent to 115 billion minutes.

Looking ahead to fiscal first quarter, Microsoft expects revenue to decline in the high teens.

Editor's note: The writer misread Microsoft's press release, which states: "Operating income and loss per share for the quarter were $192 million and $0.06 per share". As such, this report wrongly stated Microsoft had a $192 million loss, when in fact it is operating profit. However, when accounting for taxes, Microsoft has a net loss of $492 million. We apologize for the error, which is corrected.