Microsoft Takes $900M Charge on Surface Flop
July 18, 2013 6:40 PM
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. (
) 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
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.
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
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.
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.
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.
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