Microsoft Taking $6.2 Billion Charge, Lowers Online Services Growth Expectations

Microsoft Corporation (NASDAQ: MSFT) disclosed that it will need to take a massive charge after the close on Monday. Before you hit the panic button here you really need to understand what the charge is about even though the figure is massive on the surface. The charge is a non-cash accounting charge, so it is not as though Microsoft is having to fork out $6.2 billion in cash. Still, when investors see a $6.2 billion charge it is not going to go unnoticed.

Steve Ballmer and friends will recognize a “non-cash, non-tax-deductible income statement charge for the fourth quarter of fiscal year 2012 for the impairment of goodwill in its Online Services Division segment, mostly related to its 2007 aQuantive, Inc., acquisition.” In short, it is effectively a writedown of the company’s goodwill on the balance sheet (listed as almost $19.7 billion for the last quarter).

Microsoft noted, “Under accounting guidelines, companies are required to conduct an annual goodwill impairment test for each business unit. Goodwill arises in an acquisition when the fair value paid for a business exceeds the value of the identifiable net assets. The goodwill in the Online Services Division was substantially the result of the 2007 acquisition of aQuantive. As a result of its 2012 impairment review, Microsoft has determined that a write down of its Online Services Division goodwill of approximately $6.2 billion is required.”

Microsoft did try to show the upside here behind the math… It said that Bing search share has been rising in the United States, revenue per search has been growing, MSN is the No. 1 portal in 29 markets worldwide, and the company’s partnership with Yahoo! Inc. (NASDAQ: YHOO) has continued to expand geographically. While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates. Still, the company said, “ While the aQuantive acquisition continues to provide tools for Microsoft’s online advertising efforts, the acquisition did not accelerate growth to the degree anticipated, contributing to the write down.”

Again, this is not a cash charge and it is not as though the company has to pay this figure. Microsoft sees no impact its ongoing business or financial performance. Microsoft closed down 0.1% at $30.56 on Monday and shares are down 0.4% at $30.43 in the after-hours session. If this was a $6.2 billion cash charge you would be seeing a reaction that is exponentially worse. Also, the market capitalization rate here was $256 billion at the close.

JON C. OGG