Surface RT tanks Microsoft's earnings

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Microsoft fell way short of analyst estimates for its fourth fiscal quarter, with revenues nearly a billion dollars short of what analysts had expected.

The culprit? Microsoft’s Surface RT tablets. A lack of sales forced Microsoft to take a $900 million charge, in addition to a previously deferred $782 million charge related to Microsoft Office.

Sources close to Microsoft said that the charge reflects the recent pricing changes for Surface RT.

Surface RT

Microsoft reported net income of $4.97 billion (59 cents) on revenue of $19.90 billion, nevertheless, which showed strong improvements from a year ago. The company reported a 10.1 percent increase in revenue from a year ago, when Microsoft reported a loss of $492 million. For the fiscal year, Microsoft reported net income of $26.86 billion on revenue of $77.85 billion.

Analysts polled by Yahoo Finance expected Microsoft to report an EPS of 75 cents per share, on revenue of $20.73 billion.

Microsoft has struggled to convince consumers to support its newly released Windows 8 operating system, but the company recently released a preview of Windows 8.1 as a “do-over” to win back customers. Win 8.1 has customer-friendly features that include the ability to boot directly to the desktop, as well as a “start button” that takes them back to a reorganized Windows Start Page.

Looking forward

Steve Ballmer, Microsoft’s chief executive, took a forward-looking approach Thursday, pointing to the company’s recent reorganization as a recipe for success.

“We are working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs,” Ballmer said in a statement. “Our new products and the strategic realignment we announced last week position us well for long-term success, as we focus our energy and resources on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value the most.”

Steve Ballmer

In a study conducted by online advertising network Chitika, the share of North American Internet usage from Windows 8 operating systems has grown to 4.8 percent, the company said Wednesday.

"Windows’ hold on the continental desktop OS marketplace remains as strong as ever,” Chitika said in a statement. “While this is certainly good news for Microsoft, it is tempered by the continued growth of mobile web browsing, where the company is not as strong, along with the more gradual slope of Windows 8 growth rate within North America."

"However, Microsoft’s decision to make some changes to the recent Windows 8.1 update may spur more users to adopt the new OS, as the company has attempted to address some of the user concerns surrounding the initial version of the software.”

Microsoft’s Windows Division revenue grew 6 percent for the fourth quarter and 5 percent for the full year. Excluding the $540 million impact of its Windows Upgrade Offer revenue deferral, however, the Windows Division revenue would have decreased 6 percent for the fourth quarter and 1 percent for the full year.

Cloud services

Microsoft was also affected by the continued slide in the PC market, which has seen consumer buy tablets and phones rather than PCs. Amy Hood, Microsoft’s chief financial officer, said that Microsoft is instead investing in cloud services.

“While our fourth quarter results were impacted by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter. We also saw increasing consumer demand for services like Office 365,, Skype, and Xbox LIVE,” Hood said. “While we have work ahead of us, we are making the focused investments needed to deliver on long-term growth opportunities like cloud services.”

Microsoft’s traditional pillars of strength continued to buoy the company.

  • Microsoft’s Business Division reported the highest profits and revenue, at $4.87 billion ($4.1 billion a year ago) and $7.2 billion respectively ($6.3 billion a year ago).
  • Server and Tools reported $2.3 billion in profits (versus $2.04 billion a year ago) on $5.5 billion in revenue ($5.1 billion a year ago).
  • Microsoft’s Entertainment and Devices Division also saw its losses shrink from $252 million to $110 million, as revenues grew from $1.78 billion to $1.92 billion.
  • Microsoft’s online business continued its money-losing ways, with a loss of $372 million on increased revenue of $804 million.
  • Bing organic U.S. search market share was 17.9 percent for the month of June 2013, up 230 basis points from the prior year period, Microsoft said.

“We continue to see strong demand for our enterprise products and services, with more and more customers making long-term commitments to the Microsoft platform,” said Kevin Turner, chief operating officer at Microsoft, in a statement. “The growing adoption of our cloud services, including Office 365, Windows Azure and Dynamics CRM, continues to demonstrate our leadership position in the cloud.”

Microsoft did not release a revenue outlook.

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At a Glance
  • Surface RT is packed with productivity potential, and finds a certain measure of success in reinventing the tablet form factor. But its hardware isn't perfect, and its Windows RT operating system lacks flexibility and app support.


    • Inspired industrial design; nifty kickstand and keyboard options
    • Fun, fluid, powerful touch gestures
    • Delivers legit Microsoft Office support--on a tablet, no less!


    • Display isn't world-class
    • Windows RT is the hobbled alternative to Windows 8
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