Overseas Weakness Hurts Microsoft's Ad Business

Windows 7 was the star of a Microsoft’s second fiscal quarter, with company executives spending a lot of time boasting, during an investor call, about how the new operating system played a big part in the quarter’s record revenue and record profit.

But when it came time to talking about Microsoft’s online services division, which houses the company’s Internet advertising businesses, Microsoft General Manager of Investor Relations Bill Koefoed and new CFO Peter Klein hit the gas pedal and sped past. There were only a few areas of Microsoft that didn’t have a good second quarter, and online services was one of them.

Even though Microsoft’s new search engine, Bing, is gaining traction, the online services division’s $581 million in revenue represented a 5 percent decline from the prior year. Executives expressed confidence the ad business will improve. “The outlook for online advertising appears to be improving,” Klein said. “We expect revenue to be roughly in line with the market for the third [fiscal] quarter and the full year.”

Koefoed cited the overseas economic situation as having a negative impact on display ad sales. “While search revenue grew, display revenue was hampered primarily by international rate declines,” he said.

Much of the online division’s fate could rest in the outcome of its pending partnership with Yahoo. Koefoed mentioned Yahoo, but only very briefly. “Regarding our Yahoo partnership, we are still working through the regulatory review process and continue to be hopeful the deal will be approved early this year,” he said.

Although it didn’t rise to Windows 7’s level of stardom – the execs said record sales of the OS were a huge part of its 60 percent increase in quarterly profit – Bing got a pat on the back. “We continue to be pleased with Bing’s momentum to date, including seven consecutive months of share gains in the U.S.,” Koefoed said.

Nevertheless, Klein said Bing’s success will be a “long-term process.”