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Microsoft Earnings: Why They Were A Bad Surprise

Thursday, 17 Jul 2008 | 5:00 PM ET

Ouch. The Microsoft news was a real surprise, especially with the level of optimism swirling through these shares, and the level of transparency they boast.

In other words, a surprise, is a real surprise when it comes to Microsoft.

The company missed the Street expectations by a penny, so in the big scheme of things not such a devastating issue. But the miss comes on far better than expected top line growth: $15.8 billion instead of the $15 billion analysts expected. What's the problem here?

Why couldn't Microsoft come up with a way to translate more of that topline growth to the bottom line?

That's issue number 1. Of course, the deeper issues come from the company's guidance and what individual business units reported that could point to more fundamental, structural problems at the company. Not gaping holes, but cracks along the way. The Street was looking for 49 cents and $15.06 billion for Microsoft's First Quarter; instead, Microsoft offers an EPS range of 47 - 48 cents on $14.7 billion to $14.9 billion in revenue.

For the full year, Microsoft offered a new range of $2.12 to $2.18 on revenue of $67.3 billion to $68.1 billion. the Street was at $2.16 and $66.9 billion to $68 billion. Again, higher than expected revenue; lower than expected EPS. And that's a problem.

Digging deeper: Microsoft's sluggish "client" business picked up steam, posting $4.37 billion instead of the $4.15 billion expected. Microsoft's "server" business was right in line at $3.74 billion, same with the Microsoft "business division" at $5.26 billion and "entertainment and devices" at $1.575 billion. The company's online unit continues to struggle, with $858 million in revenue when analysts though the number would be well above $950 million, but the unit still lost a whopping $488 million. That too is a big surprise.

The company has some explaining to do. And of course, any color on the Yahoo saga would be helpful. In the meantime, investors in Microsoft might have to come to terms with the fact that even a company run as well as Microsoft might be having some trouble controlling costs. Today's report, with such a heavy loss in online business may also serve as a clarion call to those investors wondering why Microsoft might need Yahoo so badly.

Questions? Comments? TechCheck@cnbc.com

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