On Thursday, Microsoft (MSFT) announced its Q4 results, ending the year with $60.4 billion in revenues – 18% growth for the year even in the current economic conditions.

Quarterly revenue was $15.8 billion, exceeding the market’s expectations of $15.7 billion. Over the year, Q4 revenues recorded growth of 18% and sequential growth of 9%.

By segment, Microsoft Business Division [MBD] contributed $5.2 billion and grew 12% over the year. The Clients Division brought in $4.4 billion, recording annual growth of 13%, and Server and Tools contributed $3.7 billion, growing 17% over the year. Entertainment and Devices contributed $1.6 billion, growing 27%, and the Online Services Business brought in $0.8 billion, recording growth of 19% over the year.

EPS of $0.46 was marginally below market expectations and the previous quarter’s EPS of $0.47. EPS grew 48% over the year.

During the quarter, Microsoft repurchased 171 million shares worth $5 billion and paid $1 billion as dividends.

The company expects revenues of $67.3 - $68.1 billion for the year, with growth of 11% - 13% and Q1 revenues of $14.7 - $14.9 billion. It is expecting growth of 17% - 20% in operating income for a total of $26.3 billion - $26.9 billion for the year. For Q1, the company expects operating income to be $5.9 billion-$6.0 billion.

Online business continues to be an Achilles heel for Microsoft. For the year, online business recorded a net loss of 38%, or $1.2 billion, and management talked about plans to invest heavily in the online business to get it in shape.

Microsoft is trying new strategies to drive query share improvements and business model innovation, specifically for high-value commercial search. The company is enhancing content through improvements in user experience, social media consumption and premium content. It also acquired Portugal-based MobiComp to deliver end-to-end experiences across PCs, phones and the web. MobiComp’s expertise includes building innovative mobile data protection and sharing services.

Microsoft recognizes advertising as a good business opportunity with a market potential of $80 billion by 2012. To address this space, the company acquired Navic Networks, a leading provider of television advertising solutions, to enhance digital advertising across online and offline environments.

The companyy realizes that search is its weakest link and had hoped the acquisition of Yahoo! (YHOO) would have helped resolve this issue. However, with the deal mucked up, the company is back to square one.

In the quarter the company completed the acquisition of online travel search engine, Farecast, for $115 million. The transaction does suggest that Microsoft is finally paying attention to the verticalization opportunity and not merely buying online space to experiment. The company also announced the acquisition of semantic search engine Powerset, which I hope the company will apply to gaining ground in vertical search. Unconstrained Semantic Search is very difficult to implement. You can read my piece on this subject, Web 3.0 and the Semantic Web, to catch up on the details.

Meanwhile, many Yahoo! shareholders are still hoping for an acquisition by Microsoft, even after Bill Miller of Legg Mason sided with Jerry Yang and the current board.

Microsoft’s stock did not react positively to the results and the outlook, and fell 6% to $25.87 after trading hours. Later on, it did manage to rise to $27.52. Earlier in the month it had reached a new 52-week low of $23.19.

I also wonder when the Vista problems would start showing up as a core business issue at Microsoft. Vista sucks. Mac shipments grew nine times faster than the overall UPC market (4.2%) in the most recent quarter. An alternative is developing that may become a tsunami that washes over Microsoft in a few quarters, hitting its core operating system franchise.

I have also been hoping that Microsoft will get into SaaS via acquisitions, which has not happened yet. Perhaps its concerns are the same as Larry Ellison’s - that SaaS is not yet a highly profitable sector. But I think it will be both highly profitable and highly predictable in the long run, and it is short-sighted on both Oracle’s and Microsoft’s parts to not get into the game while its players are still relatively small.

Overall, things are not encouraging.

Disclosure:  None

• Travel Search: Hotwire Heating Up in Demographic Segment Performance  »
• How Low Can Google Go?  »
• Why eBay Needs Shipping Cap  »
• Netflix Adjusts Guidance: No Sector is Recession Proof  »
• Ad Slowdown Presents E-Commerce Investment Opportunity   »

Sramana Mitra

• Bio & more articles
• Sramana Mitra on Strategy
• Entrepreneur Journeys