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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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RE: Microsoft's reset
By drycrust3 on 7/18/2013 11:49:03 PM , Rating: 2
When I worked for the phone company, they quite regularly did organisational changes, and often it seemed these were related to the introduction of new technology. I wouldn't say they'd do a change with every new product, I don't think they could have kept pace with that, but it did seem that with every new major product there was a change.
I think the idea of "Functional" or "Divisional" organisation is misleading, whether it is one or the other is less important than whether Microsoft is adapting to the new technology so it is keeping up or staying ahead of the competition, which it isn't. That adapting to new technology is the reason why you change organisation, just as you change the way you think about new technology when you buy it.
Sure, it has Windows 8 on sale, but that isn't where Microsoft should be, they should be the one fighting Apple for first place in both the tablet arena and the smartphone arena, and they aren't.
To me, changing organisational structure is almost irrelevant without the reason being to adapt to change in technology.
Another point is when you look at Android phones, every manufacturer tries to put their own interpretation of what the ideal home screen looks like. When you compare those with Microsoft's, you can see a world of difference: Microsoft's doesn't inspire someone to say "I must have that".

RE: Microsoft's reset
By Tony Swash on 7/19/13, Rating: 0
RE: Microsoft's reset
By drycrust3 on 7/20/2013 2:40:50 AM , Rating: 1
But Jobs had unequalled authority in a battered and almost despairing Apple organisation,

I think this is part of the key to Job's success: he was trying to rescue a dying and demoralised company. What did it matter if some products, with limited longevity, were tossed aside in the drive for long term success?
If another Steve Jobs turned up at Apple today would he be given the same opportunities as did Steve Jobs 1? No, almost certainly not, and that is the same problem facing Ballmer: he is trying to keep a profitable company profitable, he isn't trying to bring Microsoft back from the brink of collapse.

RE: Microsoft's reset
By Tony Swash on 7/20/2013 7:10:25 AM , Rating: 1
If another Steve Jobs turned up at Apple today would he be given the same opportunities as did Steve Jobs 1? No, almost certainly not, and that is the same problem facing Ballmer: he is trying to keep a profitable company profitable, he isn't trying to bring Microsoft back from the brink of collapse.

I agree. In a way the problem for Microsoft is that it's legacy business is still big and healthy and making lots of profits so the incentive to accept profound corporate change is still not there yet. Maybe Microsoft needs a near death experience and then someone brought in to save the company who has the authority of the last chance. That's still a long way off and may never happen though.

Microsoft has some legacy businesses that are so strong that it may never face an existential crises like Apple did which would mean it never has to embrace profound change and so slides into being a bit like IBM. Big but hardly interesting, and not a driver of the tech world. They are almost there already.

"And boy have we patented it!" -- Steve Jobs, Macworld 2007

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