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Microsoft Earnings: Redmond Pays the Cost of Cool

Commenting on earnings only a few hours after they come out (we're writing this on Thursday afternoon, FYI) is a bit like reading the CliffsNotes for a great novel and then doing a book report. Earnings reports from big companies like Microsoft are absolute monsters (seriously, check this thing out), and they're full of subtle nuances that press releases and a few wire-service stories can't fully capture.

But for our purposes today, the CliffsNotes of Microsoft's earnings announcement will be just fine. And the major character in this story is the forlorn Xbox, the infamous video game console that Redmond now has to fix…to the tune of more than a billion dollars. Microsoft actually ended up doing fine -- although not spectacularly well -- in its fourth fiscal quarter despite the problems with the Xbox.

And its year-end numbers -- remember, Microsoft's fiscal year runs from July through June, not that you didn't know that -- were fairly staggering: For the first time, Redmond earned more than $50 billion in a single fiscal year. So those Xbox repairs cost about one-fiftieth of the company's annual haul. Just to put things in perspective.

Quarterly numbers seemed to be about what Wall Street expected, so it's hard to say how this earnings report will affect Microsoft's stock price, which, despite about a 6 percent rise this fiscal year, still trailed Oracle, Google, Apple and the S&P 500 in terms of performance. The fourth quarter's final tally could have been better, of course. For instance, the Xbox repairs showed up as a one-time expense, but it fairly shaved the company's earnings-per-share figure.

The Xbox debacle is all part of Microsoft's ongoing -- and, thus far, mostly unsuccessful -- attempt to be cool. The console hasn't yet made any money and has now surely cost more than Redmond ever expected. Losses for the company's Entertainment and Devices division were up 183 percent in 2007 compared with 2006. Microsoft's Online Services Business division -- think MSN and almost anything called "Live" -- saw losses expand, too.

But that's the bad news, and, as you might expect, there's lots of good news. Vista seems to be bumping along, sales-wise, mainly because -- as we see it -- people who buy new computers get it by default, not because anybody seems to particularly like Vista. Still, while it might be a critical failure and a dud in the enterprise channel thus far, it's raking in dollars for Redmond. And Dynamics, Microsoft's enterprise software offering, showed up as a 24 percent increase in customer billings in the company's fourth fiscal quarter.

So the story of Microsoft's earnings has a happy -- if not massively, spectacularly happy -- ending, despite a few plot twists. Which leads us to wonder (again), actually -- why does Microsoft try so hard to be cool? How much more money will it cost Redmond before the company either turns its fortunes around with Xbox and search or just stops pumping so much into both efforts? In Microsoft's case, we suppose, money is no object.

What's your take on Microsoft's earnings? Are you pleased with the direction in which the company is moving? Talk to me at lpender@rcpmag.com.

Incidentally, there were lots of earnings reports this week, including numbers from Intel and Google, the latter of which missed Wall Street's expectations and took a bit of a hit.

Oh, and while we're adding footnotes, guess what's back? The Microsoft-to-buy-Yahoo rumor!

We'll get back to running the loads and loads of reader e-mails next week, so keep them pouring in to lpender@rcpmag.com, and thanks to all of you who have taken time to write.

Posted by Lee Pender on 07/20/2007 at 1:21 PM


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