Microsoft Online Earnings Slump Despite Bing Growth

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Year-over-year, Microsoft on Thursday said its online division lost $560 million for the fiscal first quarter. That's despite the fact that revenue at the unit, which includes MSN and Bing, rose 8% year-over-year from $487 million to $527 million.

Putting the losses in the most positive light imaginable, Microsoft said Thursday: "For yet another quarter, Bing continued to grow market share, while achieving major milestones in implementing Microsoft's partnership with Yahoo."

More broadly, Kevin Turner, chief operating officer at Microsoft, said: "Customer demand and excitement for our cloud and commercial online services continue to grow as demonstrated by major new customer wins this quarter for Windows Azure and by the significant customer interest in our recently announced Office 365 service."

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Meanwhile, thanks to the success Office 2010, Windows 7 and Xbox 360, Microsoft sales rose 25% to $16.2 billion for the quarter ended Sept. 30. Net income rose 51% year-over-year to $5.41 billion -- safely beating Wall Street expectations for both sales and earnings.

"This was an exceptional quarter," Peter Klein, chief financial officer at Microsoft, said Thursday. "Our ability to grow revenue while continuing to control costs allowed us to deliver another quarter of year-over-year margin expansion."

Microsoft and Yahoo, which launched their search deal earlier this year, said they completed the migration of Yahoo advertisers to Microsoft's adCenter on Wednesday.

Under the 10-year agreement, both search engines will maintain their own branding, while Yahoo is responsible for acquiring premium advertisers. Microsoft, in turn, agreed to pay Yahoo nearly 90% of the revenue it accumulates from searches via Yahoo's network of sites.

Microsoft faced backhanded criticism from an unlikely source this week. Ray Ozzie, the software giant's soon-to-be-ex chief software architect, said it had fallen behind key rivals, and was in danger of premature obsolescence.

Regarding Microsoft's competition, Ozzie wrote in a memo this week: "Their execution has surpassed our own in mobile experiences, in the seamless fusion of hardware and software & services, and in social networking & myriad new forms of Internet-centric social interaction."

Microsoft therefore needs to prepare for a "post-PC world," dominated by "cloud-based continuous services that connect us all and do our bidding, and ... appliance-like connected devices enabling us to interact with those cloud-based services."

The solution, said Ozzie? Just a few "killer apps and services," along with a handful of "killer devices."

For the record, Ozzie isn't leaving Microsoft immediately, as he will being working on "the broader area of entertainment" for the company for an undetermined period of time.

Following Microsoft Office 2010's first full quarter on the market, revenue from Microsoft Office rose more than 15% year-over-year.

Sales of Xbox 360 video game consoles grew 38% and outsold every competing console in the U.S. for each of the past four months, Microsoft said.

PC sales were also strong, with revenue rising 10% from software sales through Microsoft's resellers.

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