Microsoft bets more online

Microsoft Corp. outlined plans to boost spending on its online businesses Thursday, even as new financial results showed the company's payoff in that area falling short of its expectations.

Fourth-quarter revenue rose to $838 million in the company's Online Services Business -- a 24 percent increase from last year but well below the 37 percent to 41 percent revenue growth that Microsoft had been predicting.

Online advertising is the one area of the company that seems to be feeling the effects of turmoil in the broader economy, said Chris Liddell, Microsoft's chief financial officer, in a conference call with analysts.

But he expressed confidence about the long-term prospects.

Along those lines, Microsoft said it is boosting its budget for operating expenses by $500 million in the current fiscal year, primarily to fuel its online strategy. Microsoft has been focusing on expanding its online business from within after failing in its $44.6 billion bid to acquire Yahoo.

"We do not make these investments lightly, as the loss in this division will be a drag on an otherwise exceptionally good performance," Liddell said.

"However," he added, "we believe the additional investment of several hundred millions of dollars is worth the short-term cost, given the opportunity to participate in a market where the opportunity is measured in the tens of billions of dollars."

Microsoft's Online Services Business posted a $488 million loss for the fourth quarter -- more than twice the loss it reported in the same quarter last year.

Results in Microsoft's flagship Windows and Office businesses were strong, in contrast. For the quarter, the company posted overall revenue of $15.84 billion, up 18 percent, beating expectations. Microsoft's quarterly earnings per share were 46 cents -- missing, by 1 penny, the expectations of analysts.

For the fiscal year, ended June 30, Microsoft reported revenue of $60.4 billion, an increase of 18 percent, and profits of $17.7 billion.

Investors were unimpressed, sending the company's shares down more than 6 percent in after-hours trading, following the earnings release. Microsoft's stock had completed regular trading at $27.57, up 1 percent.

Liddell said the latest results in the Online Services Business reflect the current state of the Internet advertising market. Web advertising company ValueClick reduced its financial forecasts this week, citing the economy. Google, which relies on online advertising, fell short of Wall Street's profit expectations.

"I think you're seeing, from results of other companies, weakness in that general space," he said. "There is a direct impact, and we're not immune to that."

But Google's lower-than-expected profits were the result part of a decline in interest income, as a result of its smaller cash reserves following its DoubleClick acquisition. Google's revenue beat expectations, unlike Microsoft's Online Services Business.

That suggests a different explanation for Microsoft's quarterly online revenue shortfall, said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. Microsoft's on-again, off-again attempts to acquire all or part of Yahoo may be making advertisers uncertain about Microsoft's strategy and less willing to commit big budgets to its advertising system, Parakh said.

The revenue in the Online Services Business "was a huge miss, even based on their internal expectations," he said.

Given the latest result, investors may be skeptical about the plan to boost spending on the online initiatives, analysts said. The effects were evident immediately in the company's earnings projections for the current year. Microsoft now says it's projecting annual earnings of $2.12 per share to $2.18 per share, down slightly from its previous range of $2.13 per share to $2.19 per share.

Recent reports show Google continuing to increase its share of the Web search market.

Under the circumstances, Microsoft will be under pressure to detail exactly how it plans to spend the money -- and what kinds of results it will see -- during its annual meeting with financial analysts in Redmond next week, said Charles Di Bona, analyst with Sanford C. Bernstein and Co. in New York.

"It's incumbent upon them to be extremely persuasive next week," Di Bona said, explaining that investors want to know what the return will be not just from new spending but from all the money that Microsoft has put into the business over the years.

Colleen Healy, Microsoft's general manager of investor relations, said in an interview that Microsoft will use the money in part to boost awareness of its Live Search engine and further develop the company's advertising system. Microsoft also will invest more in its MSN portal.

Another of Microsoft's younger businesses, the Entertainment and Devices Division, reached its goal of operating profitability for the fiscal year -- posting a $426 million annual profit, despite a $188 million loss in the recent quarter. The division includes the company's video-game development groups and Xbox 360 game console.

And for now, Microsoft's traditional businesses continue to provide the financial cushion for its fledgling enterprises. Quarterly revenues in the PC Windows division were stronger than Microsoft and analysts had expected, at $4.4 billion, up 15 percent. Profits in the division were more than $3.2 billion.

Healy attributed the result to strong Windows Vista sales, saying that the company has now sold more than 180 million Vista licenses since the operating system was launched. In addition, she said, the company benefited from progress against software piracy during the fourth quarter.