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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 Tony Swash on 7/19/2013 7:07:48 AM , Rating: 0
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.

I think that is the description of the problem but not a diagnosis of it's causes or a remdey. Microsoft has missed every significant development in the tech markets in the last ten years and has zero presence in the now dominant mobile device market. The issue for MS, and for anyone that wants to see MS succeed, is to understand why that happened and what can be done to turn the situation around.

Clearly MS itself has decided that the issue of the way it is fundamentally organised is the key to turning it's fortunes around. Hence the very radical reorganisation announced just over a week ago. They probably came to that conclusion by looking at what happened at Apple after Jobs return, which was the biggest turn around of fortunes in US corporate history, and decided that Apple's radical adoption of the functional organisational structure, a set up vanishingly rare in big companies with diverse product portfolios and almost always the model used by successful startups with just one product, was the biggest key to Apple's success.

MS are probably right about the importance of the role of the functional organisational structure in Apple's turn around but the question is will it work for Microsoft? Ben Thomson's article makes two good points I think.

One is that for the functional model to work in very big corporations it is necessary for the company's product portfolio to be as simple and streamlined as possible with a small range of major products. That was the model that emerged at Apple after Jobs and one it has retained so far. Adopting such a model at Microsoft will be very hard but not impossible, it means killing off a wide range of product lines, including profitable ones. Most long term Apple observers will well remember the hue and cry caused by Jobs quickly killing off a whole range of products and product lines after his return: clones, the newton, all Apple printers, most of the Mac range, Open Doc, ect, etc. All killed. But Jobs had unequalled authority in a battered and almost despairing Apple organisation, does Ballmer the CEO during MS's decline, have the authority or will or vision to be so radical? Ballmer looks more like Gil Amelio, or on a bad day Michael Spindler, than Jobs but maybe he has it in him. Watch the product line, if there are no major product cuts in the next twelve months then that is a sign that the recent reorganisation will be hastening rather arresting MS's decline.

The second point Ben Thomson makes is that successful organisations organised around function are staffed by managers who are different to those organised around divisions. The latter tend to be staffed, at the upper and middle management levels, by generalists following an individual career path moving across multiple divisions. Functional organisations on the other hand tend to be staffed by experts working long term around a particula function. Imagine for example what would be the response if Apple announced tomorrow that Jonathan Ives was taking over as Senior Vice President Technologies and Bob Mansfield was taking over as Senior Vice President Design, such a scenario is laughable and ludicrous but in organisations organised in divisions that sort of move is quite common. So the reorganisation at MS can only work by transforming career paths and work styles of thousands of managers. A very, very, difficult task. Remember that when Jobs arrived at Apple he brought an entire new top management team with him from Next, a team that was used to working in a functionally organised company, and this team essentially took over the entire top management at Apple forcing out many old faces in the process. It was a corporate culture coup.

I agree with Ben Thomson's pessimism but there have been big surprises in US business history and MS and Ballmer are dogged and determined. It is certainly going to make a fantastically entertaining show over the next few years. it will like watching a novice tight rope walker crossing a deep canyon on a high wire, painful to watch but who can look away?

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.

"Nowadays, security guys break the Mac every single day. Every single day, they come out with a total exploit, your machine can be taken over totally. I dare anybody to do that once a month on the Windows machine." -- Bill Gates

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