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Summary:

Microsoft (NSDQ: MSFT) has announced its Q308 earnings, and its revenues and profits are up for the quarter. Revenues came in at $15.06 bill…

imageMicrosoft (NSDQ: MSFT) has announced its Q308 earnings, and its revenues and profits are up for the quarter. Revenues came in at $15.06 billion, a 9 percent increase over the year-ago quarter. Net income was $4.37 billion, up slightly from $4.29 billion in the year-ago quarter. The company is also downward revising its estimates for next year in keeping with the economic environment, especially for the second half of 2009. And the pitch this quarter from MSFT: we can help you save money. “Our customers are asking how they can save money and do more with less…Microsoft is uniquely positioned to help our customers save money through supplier consolidation, increased productivity, and a low total cost of ownership through the depth and breadth of our product portfolio and solutions.” Yes, funny.

Division wide: In its Entertainment and Devices Division (EDD), which includes Xbox and Zune, revenues came in at $1.81 billion, down from $1.93 billion in the year-ago quarter. Operating income for the division was $178 million, up from $167 million in the year-ago quarter. In its Online Services Business (OSB) unit, which includes MSN and other online advertising services, revenues came in at $770 million, up from $671 million in the year-ago quarter. Operating losses for the division widened significantly, to $480 million, from $267 million.

More after the jump

From its 10-Q, just filed with SEC, some details on M&A costs and divisional numbers: OSB revenues grew as a result of increased online advertising revenue and incremental aQuantive revenue, partially offset by decreased access revenue. Online advertising revenues increased $72 million or 15 percent, to $557 million. Agency revenue, which is solely derived from aQuantive, was $98 million for the quarter, up from $51 million for the year-ago quarter. Its dying ISP revenues decreased $20 million or 29 percent, to $50 million, reflecting continued migration of subscribers to broadband.

For EDD: Revenues fell primarily due to decreased Xbox platform and PC game revenues, partially offset by increases across other EDD product revenue. Xbox 360 platform and PC game revenue decreased $331 million or 22 percent, primarily as a result of the $330 million of incremental revenue from the launch of Halo 3 in Q307 and decreased revenue per Xbox 360 console as a result of price reductions during the past 12 months. It shipped 2.2 million Xbox 360 consoles during Q308, compared with 1.8 million consoles during Q307. Other EDD product revenue increased $216 million or 51 percent, led by increased sales of application software for Apple (NSDQ: AAPL) computers, the Zune digital music and entertainment platform, and mobile and embedded device platforms.

On M&A: “We acquired four entities during the three months ended Sept. 30, 2008, for total consideration of $385 million. As a result of these acquisitions, we recorded $312 million of goodwill.”

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  1. MSFT's reported online ad and agency growth rates are not organic: the year-ago comparison includes only half of a quarter's contribution from the aQuantive acquisition. The AQNT deal closed on Aug. 10, 2007, about midway through MSFT's Sep. 2007 quarter.

    Since MSFT only owned aQuantive for about half the Sep. 2007, MSFT's reported y/y growth rates for agency and online ad revenues will be articifially higher than an apples-to-apples, or organic, comparison. You have to adjust for AQNT's revenue streams being in only half of the year-ago quarter to get something closer to true organic growth rate.

    For the Sep. 2007 period, AQNT contributed $51mm in agency revenue and $29mm in online ad revenue (per MSFT's 10/07 1o-Q). If you normalize these amounts for a full quarter (assuming a linear quarter), then MSFT's agency revenue was DOWN y/y, and online ad revenue was up 8% y/y in Sep. 2008, not 15%.

    Admittedly September quarters are typically more back-end loaded in the ad biz, as the back-to-school season positively impacts September vs. the slower summer months of July and August. However, the point is that MSFT's reported growth rates are most likely not a true indicator of their agency and online ad revenue growth rates, and this back-of-the-envelope analysis suggest agency and online ad growth rates that are more in context with what other companies have reported so far this earnings season.

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