Analysts Looking For More On Microsoft's Online Ad Biz

by Laurie Sullivan, Apr 24, 2008, 5:00 AM

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When Microsoft reports earnings today, analysts don't expect to hear much on the Yahoo deal--but they hope to hear about the online ad biz, and at the very least get the lowdown on the usual software and operating system metrics.

Brent Williams, analyst at The Benchmark Company, says that for legal reasons, the Redmond, Calif. powerhouse will stick to the playbook--and avoid saying anything that could change the landscape or jeopardize the deal, which has an April 26 deadline. He warns investors not to get sucked into the Yahoo saga because it will only drive short-term, not long-term results. Instead, consider key metrics like PC unit shipments, which fundamentally drive the Windows operating system business.

Microsoft may talk about the ad network in passing because it wants to point toward its ad network as cool and magical, Williams says, and at the same time highlight exciting similarities in case the Yahoo deal goes through. "You can't say our stuff is horrid today and we're desperate to buy Yahoo because that will save us," he says. "On the other hand, you can't say our stuff is utterly fabulous and there's no value to the Yahoo stuff because then investors want to know why they are spending more than $40 billion for the company."

Dawn Talbot, principal at One-On-One Research, plans to look for insight on aQuantive, the advertising company Microsoft purchased last year for $6 billion, to see if large brand names have signed on since the acquisition. That type of detail could provide some indication of whether the ad market sees Microsoft's technology as the driving factor behind increasing sales--or similar to Google, the brand name becomes just as important as the platform to drive revenue.

"The business division will drive the majority of revenue, followed by client server and tools," Talbot says, expecting to hear Microsoft justify investments in online ad networks. "The online segment is about 6.2% of total revenue for this quarter, approximately $14.6 billion."

Analysts say when considering advertising momentum, anecdotal evidence becomes more important than percentage, or contributions, to total revenue when talking about companies the size of Microsoft. Microsoft's Atlas ad network, for example, serves about 8 billion ads daily, or 200,000 per second.

Sid Parakh, analyst at McAdams Wright Ragen, says that last quarter, the Redmond, Wash. company reported online advertising grew 26%, including search and display, from the prior year. Ad sales rose about 38%, including business from aQuantive. "For the Online Services Group, we estimate $885 million for the quarter, which includes aQuantive this year--up from $623 for the year ago," he says. "We're looking for them to beat the street this quarter."

Analysts expect Microsoft to report earnings for the quarter of about 44 cents per share on revenue of approximately $14.5 billion.

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