What Microsoft has to say for itself

Microsoft has kicked off its earnings conference call, after posting quarterly results and outlook that were below what some analysts were projecting.

I'll update this blog once there's more to report. For now, Microsoft is just going through the formalities. (And the sound quality, at least here at CNET, is terrible, with investor relations chief Colleen Healy barely audible).

Update: 2:40 p.m. PDT: CFO Chris Liddell speaking, noting that, since its last conference call, Microsoft has decided to invest more in both acquisitions and in in its own online services business.

He noted disappointment in Microsoft's share price given its results, saying it reflected both general uncertainty and Microsoft-specific issues, such as the uncertain Yahoo issue.

"We remain focused on the factors in our control," Liddell said.

2:45 p.m. PDT: Healy noted that the PC industry saw 12 percent to 14 percent in the quarter, ahead of Microsoft's forecast, with Microsoft seeing its client revenue growing even faster as it returned to making piracy gains after a dip last quarter.

2:47 p.m. PDT: As for the online business, Healy said that page views and search queries came in as expected, but noted that "monetization lagged."

2:49 p.m. PDT: The company sold 1.3 million Xbox consoles in the quarter.

2:52 p.m. PDT: Expenses came in $500 million higher than expected, on higher sales of Xboxes and Microsoft consulting services, both of which have a higher cost of sale, Healy said.

Hiring improved, with Microsoft closing more open positions, Healy said.

2:54 p.m. PDT: Liddell is back. The company expects 12 percent to 14 percent growth in the PC market, but Windows client unit revenue to only climb 9 percent to 10 percent for the year. Slower growth for Microsoft is because of the continuation of a few key trends, he said. Emerging markets growth will continue to outpace mature markets, while consumer segment growth is seen exceeding business growth. Also, more PCs are being sold by large computer makers as opposed to smaller "system builders."

The company sees some of the challenges it saw in the online services business continuing, although Liddell said the company hopes that some of its investments will start to pay off later in the fiscal year.

3:00 p.m. PDT: Microsoft plans to continue to invest (read: lose money) in online services.

"We do not make these investments lightly," Liddell said, noting that the loss will be "a drag" on the rest of the company. However, he said Microsoft views a further several hundreds of millions of dollars is worth the cost given the size of the online advertising market is measured in tens of billions of dollars.

He noted the market is projected to be $80 billion by 2012, making it one of largest growth areas for the company.

Turning to Yahoo, Liddell said the company made the decision to shift gears during the quarter as a deal with Yahoo seemed less likely and after Yahoo made its deal with Google. Of the increased spending plans, Liddell said two-thirds are related to driving increased search business.

It's plans include more toolbar programs with computer makers, deals with other software makers and Internet service providers as well as a faster roll-out of its Live Search Cashback program. The company will also look at more vertical acquisitions, he said.

3:10 p.m. PDT: Liddell said he won't be taking questions on Yahoo, but he did go over the elements of its latest proposal and added, "We continue to believe our proposal is a compelling one."

On to Q and A:

Asked about the macroeconomic economy, Liddell said. "We are clearly cautious like everyone is," but added that for Microsoft's products, the company is feeling good overall. He did note that the company was seeing slowness in online advertising. "It was weak in the fourth quarter," he said. "There is a direct impact and we are not immune to that in the online space." That weakness is expected to continue, at least in the current quarter, he said.

Microsoft said it won't be deterred by either the current weakness or its failure to strike a deal with Yahoo. "Regardless of what happens with Yahoo, it's a space we are committed to."

He again pointed to the company's planned investments in areas like distribution deals as well as new business models, like Live Search Cashback. "In the short term that is not going to make the division profitable," he said.

Pressed by analyst Heather Bellini on when Microsoft might see the business shift away from being a drag on overall margins, Liddell said, "I can't promise you you are going to see a massive turnaround in the short term."