Microsoft Q2 Ad Revenue Up, but Search Growth “Modest”

Second-quarter revenue in Microsoft’s online services business was up 5% year over year, but revenue from search advertising made up only a “modest” part of that growth, the company said yesterday.

The online services division posted $624 million in sales for the quarter, including a 20% increase in overall ad revenue for the quarter. But Microsoft chief financial officer Chris Liddell told a teleconference that most of the increase came from growth in display ads. Search revenue growth for the quarter was “modest”, he said, but still notable for being the first year-over-year increase since the company started the transition from Yahoo! Overture search ads to its proprietary adCenter platform last year.

“Clearly, there is a better story on the display side, and we are growing broadly in line with the market,” Liddell said. He pointed to independent assessments, most recently from comScore, that found Microsoft’s share of the U.S. search market declining.

“We lost market share…and are clearly not happy about that,” Liddell said. “We are making progress in the short term on some of the factors that we think are important: getting advertisers onto our adCenter platform, turning the corner in terms of revenue on a quarter-by-quarter basis.”

Liddell said Microsoft expects to get revenue per search equal to what it was earning from the former Overture ads by the end of this year. But he noted that the company was moderating its financial expectations from search.

“Although we’re still forecasting growth in search queries and page views, our plans now include a more measured rate of growth for the balance of the year,” he said. “Our full forecast anticipates total advertising growth in the mid-teens, and we expect this to be driven in particular by our display business.”

Company-wide, Microsoft’s quarterly sales reached a record $12.54 billion, a 6% increase over the same period last year. Net income fell 28% from Q2 2006 to $2.63 billion, primarily because of delays in shipping its Vista operating system. Originally scheduled to hit the shelves before Christmas, Vista should actually become available next week.