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  (Source: ExtremeTech)
Investor bloodbath awaits as Microsoft tries to revamp its company

If you're trying to restructure your company into a devices and services firm, it's a pretty bad sign when you announced a $900M USD (yes, million) hit due to the sales failure of one of your flagship devices.  That's the reality facing Microsoft Corp. (MSFT) who announced earnings late this afternoon following last week's announced leadership and direction shakeup.

Things appear headed in an ugly direction for Microsoft's stock, which was trading down nearly 6 percent in after-hours.

The Surface charge comes largely prior to the $150 USD price drop on the unpopular Surface RT variant, meaning more big charges could await.  If Surface is a "real business" as Microsoft CEO Steve Ballmer proclaimed ebulliently in Feb., it appears to be failing business.

Surface was the surprise write-down on Microsoft's balance sheet.

Aside from the obvious concern -- losing money -- the Surface charge also represents the overall volatile state of Microsoft's quarterly earnings due to hordes of charges.  Overall Microsoft recorded a one-time write down of $782M USD on the Office Upgrade Offer, which dropped the business division's revenue almost in half to $722 USD (leaving revenue growth virtually flat at 2 percent).  The balance sheets reminds of two other large hits -- the $540M USD Windows Upgrade Offer and $733M USD European Union antitrust fine -- which Microsoft took in the last 12 months.

Here's Microsoft's total balance sheet.
Microsoft Earnings

Note that the online unit had a $6.2B USD (yes, billion) write-down last year, so the actual losses trimming is smaller than it looks.  But overall both the entertainment (Xbox, Windows Phone) and online services (Bing) units trimmed their losses by $100M USD or more.  Microsoft cites Comscore's numbers which indicate Bing now controls 17.9 percent of the search market.

But the clear loser was the Windows unit, whose revenue fell from $2.422B USD to $1.099B USD as PC sales slumped.

Overall analysts had hoped for earnings of around 75 cents per share ($6.33B USD) on a revenue of $20.73B USD (including the Office writedown, but not the Surface one).  Instead they got earnings of around 66 cents per share ($5.56B USD) once you removed the 7 cents per share (unexpected) Surface writedown. In other words, even excluding the unexpected Surface financial hit, Microsoft's profit fell nearly a billion dollars short of expectations due to weak Windows sales.

Steve Ballmer w Windows 8
Surprise! Windows 8 isn't selling well. [Image Source: AFP]

Microsoft has a huge cash pile -- $77B USD, so it can afford to drop a billion here or there.  And the company did announced that Office 365 (subscription) revenue was up to $1.5B USD, which should help to make the balance sheet flatter and more predictable.

But with Windows device sales in disarray, the Xbox One receiving an icy reception from gamers, and no clear breakthrough for Windows Phone/Surface, Microsoft has a lot of questions to answers in the year to come.  The answers will largel hinge on the current half as Microsoft's units reorganize and as Windows/Windows Phone 8.1 product launches.  Succeed and Microsoft may see a break in investor tension -- fall short and it will likely be hammered once more.

Source: Microsoft

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At least MS is trying new things
By Mint on 7/18/2013 8:47:25 PM , Rating: 3
They have gobs of income, so might as well experiment a bit in new markets. The original XBox lost what, $4B?

MS is in it for the long haul. They got the first generation out of the way, and with Haswell ULX and Silvermont they can properly fulfill the vision they had with Windows 8 and Surface. Experience will help them put their best foot forward.

I'm pretty sure they're going down the right road. Sub 10W SoC's are getting so powerful that hybridization was inevitable.

RE: At least MS is trying new things
By Labotomizer on 7/19/2013 9:26:56 AM , Rating: 2
I don't know why people are in denial. Every time I hear someone say Windows 8 was an answer in search of a problem I laugh at their lack of foresight. Hybridization is the future of personal computing. Windows 8 was the first attempt to solve that problem.

RE: At least MS is trying new things
By karimtemple on 7/19/2013 9:30:27 AM , Rating: 4
I agree with this 100%, but damn man they really did flop on it. They overshot the hybridization goal by several miles.

RE: At least MS is trying new things
By Labotomizer on 7/19/2013 10:05:42 AM , Rating: 2
I think there are legitimate concerns about execution. If I were Balmer I wouldn't stand on an aircraft carrier with a victory banner at this point.

But I think it's the right direction. Better to get rev 1 out of the way now before the hardware catches up and everyone does it. I hope the reorg enables them to do it very well.

RE: At least MS is trying new things
By Mitch101 on 7/19/2013 11:15:43 AM , Rating: 3
Every OS needs that must have that KILLER APP otherwise there is no need to upgrade or use it. As much as I love improvements Windows 8 has over Windows 7 the killer app doesn't exist. Vista kind of ruined that. Vista was a memory hog using twice as much memory as needed when Windows 7 came along that same machine that was specd around Vista became a killer running Windows 7. Windows 8 improves upon Windows 7 depending on who you ask but there isn't that killer app for Windows 8 that will drive people to it. I will admit there are people put off by the interface and many more are unaware it can be changed but unless it comes with a PC most people wont have a need or desire to upgrade to Windows 8 because they don't see the benefit.

RE: At least MS is trying new things
By 91TTZ on 7/20/2013 12:40:11 AM , Rating: 2
The parts of Windows 8 that people actually like are the parts that are carryovers from Windows 7. Everyone I know completely ignores the Windows store and the full screen "apps". They use the desktop much like they did with Windows 7.

Once you install Start 8 Windows 8 becomes usable.

RE: At least MS is trying new things
By YearOfTheDingo on 7/19/2013 11:04:58 AM , Rating: 2
Microsoft needs to stop experimenting with Zerg and Protoss, if you ask me. Windows 8 is an abomination.

RE: At least MS is trying new things
By Mitch101 on 7/19/13, Rating: -1
RE: At least MS is trying new things
By Motoman on 7/19/2013 11:58:52 AM , Rating: 4
You're purposefully ignoring the actual problem.

The one and only reason Win8 flopped was because of Metro.

Hybridization or not had nothing to do with it.

Win8 would have been just fine if it wasn't for Metro.

By YearOfTheDingo on 7/19/2013 2:13:35 PM , Rating: 3
Hybridization has everything to do with it actually. Individually, Windows 8 (sans Metro) and Surface are great products. It's combination that sucks. I like a dessert after the main course. I don't want the dessert to be IN my main course.

RE: At least MS is trying new things
By karimtemple on 7/19/2013 2:35:57 PM , Rating: 2
Metro is pretty great -- see Media Center Vista/7/8, Xbox 360, WP8, etc. What sucks about the Start Screen is partly that it doesn't adhere that well to Metro philosophies.

But that's just semantics, of course. But his point is solid -- Microsoft had a great goal (pre-empting the Superconvertible). I've made this point for a while now. Problem is, they were pretty bad at executing toward that goal.

By KOOLTIME on 7/19/2013 4:05:07 PM , Rating: 4
Windows 8 mistake boils down to hwo they delivered it.

They should have made the desktop version alot different aka no metro vs that tablet option.

Touch screen versions for screens that have it metro is more usefull, but for a desktop its a joke. The windows 8.1 update version, is still bad with metro, no help at all for a desktop, it makes it less useful to do work. More useless screens to pop up when not needed.

By ZorkZork on 7/19/2013 6:09:08 PM , Rating: 4
Metro is great on a 12" touchscreen. It sucks big time on a conventional laptop or on a desktop PC.

And then there is this feeling that when "in Metro" in-app-purchases is just around the corner.

Lastly, the whole idea that Metro apps could only be delivered through the Microsoft controlled store completely breaks with the history of the PC. It may be great (I'm not so sure) for tables and smartphones, but we have learned to love the openness of the PC. It will be suicide for Microsoft to try to take that away. Then I will probably go somewhere else entirely.

RE: At least MS is trying new things
By 91TTZ on 7/20/2013 12:33:40 AM , Rating: 2
People aren't in denial. The people who said that Windows 8 is horrible and is going to flop turned out to be right. It really is the wrong product for the market.

RE: At least MS is trying new things
By Da W on 7/19/2013 11:26:36 AM , Rating: 5
Microsoft is doing bad, Intel is doing bad, Apple is doing bad, Google just missed profit target BAD, Samsung is starting to do bad, Qualcomm has peaked, AMD is doing bad but that's nothing new, Nintendo is doing bad, HTC is doing bad, facebook is doing bad... start to see a trend?

This goes BEYONDthe "I hate windows 8" pissing contest. Technology is becoming a commodity, selling as cheap as a bag of sugar traded on the Chicago mercantile exchange. People can buy a 150$ device that can do prettymuch what they need.

This is the age of multiplatforms. Content creators are the new kings, not platform owners. The trick is, try to find the next big app\ cloud service before everyone else...

On that topic, I think the company that could do the best if it let go of its old platform strategy and start selling its content on every platform is Nintendo.

RE: At least MS is trying new things
By Mitch101 on 7/19/2013 11:44:54 AM , Rating: 5
Did bad or didn't meet helium inflated investors speculation?

Windows - $4.411 billion revenue with $1.09 billion profit
Online Services - $800 million revenue with $372 million loss
Servers and Tools - $5.502 billion revenue with $2.33 billion profit
Entertainment and Devices - $1.915 billion revenue with $110 million loss
Business Division - $7.231 billion revenue with $4.87 billion profit

RE: At least MS is trying new things
By FITCamaro on 7/19/2013 11:55:15 AM , Rating: 3
Seriously. If you only make $1 billion instead of $1.2 billion, somehow you're doing badly these days.

By Motoman on 7/19/2013 1:21:56 PM , Rating: 2
We all know it's not about the amount you made. It's about whether or not you met your own forecasts, and/or the expectations of the analysts.

If you said you were going to make $1.2B and only made $1.0B, that doesn't mean you're doing "badly" - it means you didn't do what you said you were going to do.

Likewise, if the analysts look at your business and take into account information you've provided and come to a consensus that you "should" make $1.2B, but only make $1.0B, then it's not that you did "badly" - it's that you didn't live up to market expectations.

RE: At least MS is trying new things
By 91TTZ on 7/20/2013 12:45:21 AM , Rating: 3
I think the point that they're missing is that Microsoft spent a huge amount of money on these new mobile initiatives and they all flopped. Windows 8 is a flop, Surface is a flop, the Windows store is a flop, and the Xbox One already has a bad reputation.

The money Microsoft is making is with their older product lines. Windows 7 is still selling fine, their server OSes are selling fine, and DVD versions of Microsoft Office is selling fine.

RE: At least MS is trying new things
By zephyrprime on 7/22/2013 10:27:38 AM , Rating: 2
Wrong. This is the age of the end of the IT boom. With processors no longer doubling in power every 18 months, the computer technology revolution is ending.

By karimtemple on 7/22/2013 2:22:10 PM , Rating: 4
ROFL, wow, a little early on that obituary there. The "computer technology revolution" won't be over until computer stop being stupid, which is a long way yet lol.

There are great strides in utility and usability that we have left to go, e.g. non-invasive BCI, artificial intelligence, and spatial/visual processing.

The revolution will be over when your computer helps you write the code you're thinking about and can quickly and reliably augment the reality seen by your eyewear. We're about 60 to 80 years away.

By Wererat on 7/19/2013 1:50:53 PM , Rating: 2
I think if it'd had a really good screen, many other things would've been forgiven. People will write apps if they can run them on PCs and tablets (and with minimal rewrite, windows phones too).

However, charging iPad prices and delivering 10 inch 720p blockiness doesn't cut it. 2048x1536 isn't even 300ppi; 1280x720 is not even close.

By Shadowmaster625 on 7/19/2013 3:45:43 PM , Rating: 5
What is the vision of surface? Tap on the search button to begin a new search. The search box opens. Tap on the keyboard icon to open the keyboard. The keyboard covers up the search box so you have to swipe the screen to get the search box to appear. Begin typing. *Oops* the search box is out of focus so you have to tap on it to bring it into focus. Now you can type your search word. *THAT* is the reality of Microsoft. That is a $77Billion corpse in action. This company is dead. It has not a single intelligent creature soul inside it. Everything it touches, it butchers...

RE: At least MS is trying new things
By 91TTZ on 7/20/2013 12:37:55 AM , Rating: 2
Randomly trying new things is a great way to lose money. Companies pay big bucks to employ people with good business sense and good ideas. Microsoft doesn't have that right now. They're increasingly making products that customers simply don't want.

The main reason for it is hubris. They've forgotten who gets to dictate the direction of the industry- it's the customer, not the company. IBM tried to steer customers toward the PS/2 when the customers and the rest of the computer industry wanted to continue down the PC compatible route. This is what enabled Microsoft to really get established in the first place. Now they're making the same mistakes IBM did.

"The Space Elevator will be built about 50 years after everyone stops laughing" -- Sir Arthur C. Clarke

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