Microsoft Keeps Them Guessing

Although MSN ad revenue grew 20% year over year (which was offset by a 30% decline in Internet access revenue), it was down sequentially, underperforming a 14% sequential increase posted by rival Google(GOOG) and 6% sequential increase at Yahoo! (YHOO), Sanford C. Bernstein analyst Charlie Di Bona pointed out on the conference call. Liddell responded that the company is hoping to address that with its launch of its own ad platform, currently being tested in France and Singapore.

Meanwhile, Microsoft's Home and Entertainment Unit, including Xbox, also failed to perform up to expectations, Microsoft execs said. Sales fell 17% from a year ago to $525 million -- a bigger decline than anticipated. The unit's operating loss remained roughly flat at $141 million.

The company's Business Solutions division, representing sales of business applications, posted a 16% jump in sales from a year earlier to $181 million, and its operating loss shrunk to $12 million from $31 million a year ago.

Unearned, or deferred, revenue -- a key measure of how many business customers are renewing their contracts to buy Microsoft software on a subscription basis -- fell to $8.8 billion from $9.17 billion in the previous quarter, which Di Valerio said was in line with the company's expectations. The first quarter is typically not a big one for customers to renew their agreements.

Di Valerio reiterated that Microsoft still expects 8% to 10% growth in the unearned balance by the end of the fiscal year.

The company's operating income, a weak point last quarter, was solid in the first quarter at $4.05 billion, including a $361 million charge for the RealNetworks settlement. Adding back that settlement charge, Microsoft's operating income fell within its guided range of $4.3 billion to $4.5 billion.

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