Microsoft 4Q profit rises, Web ad business rocky

With a Yahoo Inc. search deal uncertain at best, Microsoft Corp. plans to invest hundreds of millions of dollars more than expected in the next year to whip its unprofitable online operations into shape.

Analysts, however, wondered how long Wall Street can wait to see those bets pay off.

Microsoft said Thursday its fiscal fourth-quarter profit jumped 42 percent - or 13 percent, factoring in a hefty charge a year ago - as revenue topped $15 billion.

But due to weakness in the online business, which makes most of its money from Web advertising, the software maker missed Wall Street's earnings forecast by a penny and issued softer-than-expected guidance for the current first quarter.

Shares sank $1.65, or 6 percent, to $25.87 in after-hours trading, after rising 26 cents to close at $27.52.

For the three months ended June 30, Microsoft's profit jumped 42 percent to $4.3 billion, or 46 cents per share. In the year-ago quarter, earnings totaled $3 billion, hurt by more than $1 billion in charges related to defective Xbox game consoles.

Revenue increased 18 percent to $15.8 billion from $13.4 billion last year, just ahead of Wall Street's average forecast of $15.7 billion, according to a Thomson Financial survey. The revenue rise would have been 14 percent if not for weakness in the dollar.

"Those are very good numbers for a company of our size, in what many companies are finding challenging conditions," Microsoft's chief financial officer, Chris Liddell, said in an interview.

Sid Parakh, an analyst for McAdams Wright Ragen, wasn't buying it.

"The bottom line was disappointing," he said in an interview. "Across the board, they are investing more in growth, which is hurting the bottom line. That's been a concern about Microsoft that investors have felt for a long time."

Earnings for the thee segments responsible for Microsoft's major franchises - the Windows operating system, Office programs and server software - rose 18 percent to total $7.9 billion.

Strong PC sales helped bolster Office and Windows results. Liddell said Microsoft sold more than 40 million Vista licenses in the quarter, surpassing 180 million since January 2007.

The unit responsible for Xbox 360 lost money in the quarter but ended the year in the black, a milestone analysts have tracked for two years.

Microsoft's online business, which has come under renewed scrutiny from Wall Street since the software maker walked away from its bid to buy Yahoo in May, lost $488 million in the quarter, more than double its year-ago loss.

Liddell told analysts the company would invest hundreds of millions of dollars more than expected in the online business next year. He also forecast revenue growth for the unit would slow to between 7 percent and 11 percent in the quarter, and 18 to 20 percent for the full year, citing the tough economy.

"This is the area where we're seeing direct impact from the economic slowdown," Liddell said.

Again, Parakh was skeptical.

"We all know it's much more than the economy," Parakh said. Advertisers are waiting to see whether Microsoft and Yahoo will come together before spending their budgets with Microsoft, he said, and employees are distracted, too.

Walter Pritchard, an analyst for Cowen and Co., said Microsoft was stretching the definition of long-term investing by offering so few returns after so many years of spending.

"You could go back three years ago and say, these guys are still in the same situation. (They have a) quasi-strategy in online that isn't really clearly defined. They keep throwing money at it, and they're not getting any results," he said. "At the pace they're investing, they should be able to grow faster."

For the full fiscal year, Microsoft's earnings rose 26 percent to $17.7 billion, or $1.87 per share, from $14.1 billion, or $1.42 per share in fiscal 2007.

Sales for the year surged 18 percent to $60.4 billion.

For the current quarter, Microsoft said it expects to earn 47 to 48 cents per share on $14.7 billion to $14.9 billion in sales, shy of analysts' view for a profit of 49 cents per share on $15.1 billion in revenue.

For the full year, Microsoft forecast a profit of $2.12 to $2.18 per share on $67.3 billion to $68.1 billion in revenue.