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Microsoft’s financial health is simply unquestionable

WP Central

$6.9 Billion profit? Not bad, not bad at all

Tonight Microsoft announced its Q4 results for fiscal 2012.  Everywhere you turn, the media is writing about how the Redmond giant just reported its first loss ever.  People writing these headlines are either clueless as to financial reporting, or in search of headline bait.  But since everyone is doing it, it’s pretty crap headline bait.

So here’s the simple truth:  Microsoft reported an extremely profitable quarter with respect to its regular operations.  On top of this it also made the decision to write down the value of assets pertaining to a company it acquired back in 2007.  The acquisition of aQuantive, a digital advertising company, didn’t contribute to Microsoft’s advertising platform as expected.  When stuff like that happens, you write down the value of those assets on the balance sheet.  The write down is a wave of the accounting magic wand.  It does not represent a cash expense. 

WP Central

Microsoft posted an operating income of $6.9 billion profit, translating to $0.73 per share (a metric Wall Street cares about).  Windows, Server & Tools, and the Microsoft Business Division are all operating on all cylinders, generating gobs of cash.

This cash funds the losses for Online Services (i.e. Bing) and the Entertainment and Devices division (which includes Skype, Xbox, and Windows Phone). 

The company didn’t have too much to say about Windows Phone on the conference call.  As part of the prepared remarks, Microsoft said:

"For Windows Phone, there are now approximately 100,000 apps in the marketplace and Windows Phone unit sales grew more than 50% sequentially.  In June, we announced that Windows Phone 8 will arrive later this year. Windows Phone 8 is based on the same core technologies that power Windows 8 and it will unleash a new wave of features for consumers, developers, and businesses."

During the Q&A portion of the call, analysts didn’t even mention Windows Phone.  I wouldn’t say Wall Street doesn’t care about Microsoft’s mobile strategy, but they certainly don’t care about it in the near term.  It just doesn’t move the needle.

Naturally none of this matters much to the guys at Microsoft who are busy running the business.  They’ve got a product, Windows Phone 8, to launch.  And with the health of the mother ship, driven by Enterprise, this is a company that has essentially unlimited resources to get to market and fight for share. 

So there you have it.  The truth about Microsoft is that Wall Street loved the results, and doesn’t care one bit about the accounting loss driven by a 2007 acquisition.  The past is the past.  Unfortunately much of the media world doesn’t get that.  The story for Microsoft, this quarter, is the strength of its enterprise business.  Windows Phone Central readers can take comfort in knowing the Redmond Giant ain’t goin’ anywhere.

(Chris Umiastowski is a contributing writer to the Mobile Nation network. You can see the rest of his posts here at AndroidCentraliMore and CrackBerry.)

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Reader comments

Microsoft’s financial health is simply unquestionable

59 Comments

Business guys are smart, Microsoft's probably a little smarter than most. The media? Not so much. I totally think this is a calculated move by Microsoft to eat the aQuantive loss now before the launch(es) of Windows 8, Windows Phone 8 and Office 2013. Can you imagine the headlines if they "wrote off" this loss after Windows 8? "Microsoft Windows 8 Sales Good, not Great" or worse yet, "Microsoft Posts Loss After Windows 8 Launch". Write this off at the end of all your major products' life cycles? Kinda brilliant.

While that would be a brilliant strategy if it were true, sadly it is not. GAAP and IFRS reporting standards don't allow a company to pick and chose when it adjusts the value of the asset; It must be adjusted during the period in which the asset becomes impaired.

Ah, I did not know that. Lucky timing then I guess? I will count this as one of the many "Things I Learned Today (tm)." :)

Among other things, "going concern" is also an important item to consider when analyzing a financial report. Microsoft definitely has it.

I just want to say, in comparison to the other WPCentral article regarding MSFT's financial statements, I am glad to see one written by someone that knows a little something about financial statements (or at least seems to) 
 
" The write down is a wave of the accounting magic wand.  It does not represent a cash expense. "
Thank you for pointing that out in the article. I have been explaining that fact to others on other posts for the last couple of hours. Everyone seems to be caught up in the 'loss' and seem to miss the reason for the loss is simply a non-cash adjusting entry. 
Once again, WPCentral has proven to me why I have chosen it as my main source of WP related news over all the other sites.

It was not a cash expense in this quarter, but its was in 2007. And what they got for their 6 billion is now, in this quarter, worthless. Thats what they are basically saying. Not that Microsoft can't easily afford to throw away 6 billion, but its a clusterfuck none the less.

Lol, this little misinformation has been spread by every tech site, and even some business reporting sites all day. It pisses me off to no end to see such ignorant reporting by writers. Just wondering, doesn't Microsoft get a tax writeoff for 6.2 billion for writing down their goodwill?

No, it is a non-cash expense. When they reconcile their Net Income for Financial Purposes to Net Income for Tax Purposes they will reverse all non-cash expense entries (such as goodwill impairment and other things like amortization). 

Those other news outlets fear for their grazing field. Fear their leader may not hold the bell for long to lead the herd.

Excellent article. Not because it "appears" to favor Microsoft. But because it is the F ucking truth.

It is articles like this that remind why I come here. Now if only Mobile Nations could do a all encompassing technology site like those other pretenders and keep the same level of integrity. Give Cnet, Engadget, The Verve, Ars Technica and company a run for their money.

ugh.. i read a few articles there back when Mango launched and promptly decided that maybe there is a reason those "writers" were booted from Engadget. So much bias its not even funny.

You know. When google started i thinked that microsoft is bad company. But now i have all picture. 10 or more years ago google started new strategy of rumours, strategy of layers editors how Topolsky to creat a negative view. But now i sow that google became dark giant with unlicenzed android. They simple are unfare company

Yup. There's no question about who's the the black sheep among the IT shops right now IMO.
Their "Do no evil" strategy is definetly burried.

No, its not "just accounting".  The losses are very real. MSFT pissed away $6 billion by acquiring a firm beyond its area of expertise - and are now basically saying that their 6 billion dollar investment is, by and large, worthless. Of course their core business is still strong and stable,  and the decision as to when exactly to realize these losses and take them on the balance sheet is somewhat arbitrary - but the fact remains that the money is gone and their investment has no more value to the firm.
 
To portray this as just a reporting issue is bullshit too. 

Agreed, agreed, agreed. I'm a Microsoft shareholder and my dividend money was thrown away on this rediculous acquisition. Microsoft's enterprise profits are still subsidizing the consumer (non-Windows) portions of the company. They've now rebooted their phone strategy twice in 2 years, they spent $1B replacing original Xbox 360's (my son's was replaced 4 times), their on-line services have not made a dime, etc. Nothing's going to kill Microsoft, but the consumer parts we care about are performing very poorly.

I got some too, avg price around 24.50, so cant complain (for now). I would guess there are more writedowns to come, they bought some app-makers beyond to billion $ mark in addition to this.
 
But i appreciate that they are upfront about the valuation of their aquisitions. There are lots of others who kick their dead wood down the road reporting fantasy valuations of their assets. Although i would have liked to see it written down over a couple of years. Its not like that they dont sit on a pile of cash - instead of making pointless aquisitions for stupid amounts of dosh (yammer valuation!!) they should show some love for their shareholders and up the dividends.

As I mentioned to someone else earlier, MSFT can't pick an choose when or how to impair an asset. They are required by GAAP and IFRS reporting standards to adjust the Net Book Value to Fair Market Value once it becomes impaired (there are impairment tests done to decide whether or not it needs to be adjusted) 

Thanks, interesting. But how do you test this exactly? It sounds like there is much room for interpretation.
 
For example, their 8 billion for Skype - it may not make that much money, but the brand alone is worth alot, plus the future potential. But it seems to me its hard to put an acurate number on such things, since you cannot mark-to-market. Are there hard rules to value something like this, or is this a 'flexible'  procedure?

While there is room for interpretation I guess, it all must remain reasonable. Companies like Enron and Worldcom has caused a watchful eye to gaze upon the accounting practices of big companies. 
 
I will try to explain the IFRS impairment testing as best I can
 
First: They must determine the recoverable amount. This is the higher of the asset's cash value (fair market value less costs to sell, or net selling price), and the asset's value-in-use (the present value of all estimated future cash flows of the asset). 
 
Second: They then compare the recoverable amount against the asset's carrying value on their books. 
 
If the recoverable amount is less than the carrying value then the asset is impaired. An entry is then made to adjust the carrying value to reflect the recoverable amount.

While I'm sorry your son's Xbox was replaced 4 times(none of mine have ever had to including my Gen 1, which I still have stored). But while the acquisition may not have panned out, if it had, you would be praising Microsoft for its forward thinking. Technology companies take risks all the time. Look at web OS failed, Symbian failed, Google's web laptop failed, Dell streak, basically the galaxy note release too early to be accepted by the masses failed. Seems like you would like Microsoft to stand still and not attempt to make technology advancements.

while i agree with pretty much all the stuff u said, is it really fair to call Symbian a failure though? i mean it's been out for quiet a long time and "had" it's glorious days, but all things come to an end eventually

Wait, this wasn't a technology investment, which was my point. And individual Xbox experiences aren't as important as the fact that the RROD problem was real and cost Microsoft $1B. I didn't care about the constant replacements because they handled it so effortlessly. It was the incompetence of producing a product with such a defect in the first place. Like everyone here, I can only hope they've learned some lessons and can move ahead successfully with WP8.

While yes the Goodwill is now worthless, hence the impairment entry to adjust its value. The 'goodwill impairment charge' is just a wave of the accounting wand, which he is trying to point out. It is not an actual loss in the course of doing business. The Goodwill asset is still on MSFT's books at its original value, it just as an adjust entry underneath it to reflect its fair market value.  The money was gone in 2007 when they acquired aQuantive, which is why this loss really doesn't matter now, it just corrects the books. 

 
It is just a reporting issue, because it isn't a business or operating loss. It was put in the wrong section of the Income Statement (should have been put in Other Income/Losses not Operating Expenses), and everyone thinks that actually lost money this quarter when they didn't, they actually made quite a bit. 

The point being made is not that the 6 billion was/wasn't lost. It's the fact that it has no relevance to the actual performance this quarter. Yes, it was written off this quarter, but "the loss" was not because their business all of a sudden tanked or anything like that. It's what some sites are making it out to be, which is simply not true.

Nice post Chris.
I always enjoyed reading your posts on CrackBerry where you always told it as it was (and supported your story with facts!) often to the annoyance of the BB fanbois. :)
 

I have not seen any headlines saying Samsung's financial health is unquestionable (I am not a great fan of that company BTW, prefer HTC). Why? For the same reason nobody claims oceans are huge reservoirs of water. Some things are self-evident. If a company's position is shaky though...

The Times newspaper in the UK is running the headline "humbled Microsoft makes first loss". This newspaper has no idea about tech, and is always putting Microsoft and more recently, Nokia down. These results are great, but the media just read into them what they want!

Well done article. It's easy to see the aspiring tabloid writers are. Good to see wpcentral isn't in that camp.

I'm a microsoft guy. I make my living off their products and I generally enjoy most of what they put out across the board. I love my Lumia 900 and I'm looking forward to what Win8/WP8 is going to bring, but I'm not going to lie, I'm nervous. I have this sinking feeling that MS is going to fuck up the WP8 and RT launch. It's little things like not having Win8 devices until a month after win8 releases, stuff like that. They just aren't doing a good job, in my opinion, of capitalizing on momentum. They're treating the phone/tablet market like the desktop market in terms of product releases and their competition has done a good job of setting a different expectation. Hell, I'll readily admit that I've come to expect product launches within a week or two of product annoucements and it doesn't appear Microsoft is going to be able to meet that. I also have a lingering suspicion that a lot of the cool cross-device desktop/tablet/phone integration is going to end up getting neutered at launch, and that's going to hurt. That's the area that Microsoft can crush everyone else and deliver things that nobody else is doing and that people actually want/need and there's been frighteningly little said about this stuff. I've got a lot of clients, thousands of users that are ready and waiting for this unified ecosystem. Hopefully they will allay my fears over the coming months by getting more information out there, but as of today, I'm still nervously anxious. 

Trust me I know the feeling.  Like you I also rely to Microsoft products to make a living.  But I am also worried because I can see that they have a great chance to make an awesome product.  However, if Microsoft history of releases have taught me is that they don't live upto hype.

I am hoping that has changed with windows 8, as it seems everyone is working with "synergy" (how I hate that term) to make everything connected.  With Azure, with surface etc.

But if they screw up or get unorganized, they will hit the ground hard.

My hopes (and career) hope not and wish the best however...

Finally a proper proper article on the subject. I was also really happy to see that MS is doing great and has loads of money to take Windows Phone and go out there fighting for market.

Ha... wait till Windows 8, and the Microsoft Surface start flying out the door like hot cakes. Steve must be wringling his hands just at the thought of this

There are but a handful of companies that attain the zenith in corporate financial assessment - AAA Credit rating. Microsoft has had this honour for more than 2 decades. This is probably more time than the ages of a number of journalists that have commented on the Microsoft lost that was reported this week. They either have no idea of financial accounting or are intellectually inept. That's the simple choice - pick one!

I was pretty upset that just about every headline and story only mentioned the loss.  In a few stories they causually mentioned the record revenue or simply not at all.  They also often completely omitted the charge they took on the failed buyout which is what brought them down.  Next quarter it will be back to a healthy profit.

I meant no harm. Simply asking. Sorry for any grief for everyone involved. It seems an error on the system.
Hope MSFT & partners "surface" in tablet & mobile and kick those negative outlooks by analysts.
Thanks.

It's quite usual for today's world: no matter what the truth is, it only matters how much audience you can get. So the more provocative headline you write - the better.