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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 8:52:18 AM , Rating: 0
I agree with what you are saying. The core Microsoft problem stems from the adoption of it's 'Windows Everywhere' strategy. This has driven it to seek one Windows OS that operates across PCs and devices. This I think is a disastrously ill conceived strategy. In retrospect if Microsoft had adopted a worked up variant of it's Windows phone OS as it's general mobile OS including tablets, it would have stood a much better chance of making an impact in the mobile device markets. As it is the desktop experience is degraded by unnecessary touch elements and the touch experience is degraded by the inclusion of incongruous desktop elements. The bottom line is that Microsoft, a software company, has almost zero presence in the biggest, fastest growing and most dynamic software market on the planet and is still dependent on the desktop software market that seems in relative decline. Something went horribly wrong and sorting it out is going to be very hard, the re-org will probably deepen rather than solve the problems.

I tend to think that only a really drastic reshaping of Microsoft will suffice. Build and consolidate the enterprise business but open it much more to non-Windows services. Drop Bing. Drop xBox (I can hear the screams now), drop Windows Phone and Surface. Reset Windows back to an improved version of Windows 7. Go all out to be the biggest and best software and services vendor in the iOS and Android mobile markets. Make a well designed touch version of Office available on all platforms. Can't see any of that happening though.


"We shipped it on Saturday. Then on Sunday, we rested." -- Steve Jobs on the iPad launch














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