Microsoft Takes $900M Charge on Surface Flop
July 18, 2013 6:40 PM
comment(s) - last by
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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RE: Microsoft's reset
7/19/2013 3:12:25 PM
Actually just after I wrote a reply to your comment I came across the latest piece by Ben Thomson who says it much better than I. It's here
This a an excerpt:
The truth is that Microsoft is wrapping itself around an axle of it’s own creation. The solution to the secular collapse of the PC market is not to seek to prop up Windows and force an integrated solution that no one is asking for; rather, the goal should be the exact opposite. Maximum effort should be focused on making Office, Server, and all the other products less subservient to Windows and more in line with consumer needs and the reality of computing in 2013.
Devices are vertical, services are horizontal
The trouble for Microsoft in the devices layer is that they only know horizontal domination. When there was nothing but PC’s, the insistence on one experience no matter the hardware worked perfectly. However, a Dell and an HP are much more similar than a tablet and a web page, for example, each of which has its own input method, user expectations, and constraints. A multi-device world demands bespoke experiences, not one size fits all. Microsoft simply doesn’t seem to understand that, and the longer they seek to “horizontalize” devices the greater the write-offs will become.
However, look again at that picture: there remains a horizontal layer – services – and it’s there that Microsoft should focus its energy. For Office and Server specifically:
Documents remain essential and ubiquitous to all of the world outside of Silicon Valley; an independent Office division should be delivering bespoke experiences on every meaningful platform. Office 365 is a great start that would be even better with a version for iPad
A great many apps are simply front-ends for web-based services; an independent Server division should be delivering best-in-class interfaces and tools for app developers on every meaningful platform
"Spreading the rumors, it's very easy because the people who write about Apple want that story, and you can claim its credible because you spoke to someone at Apple." -- Investment guru Jim Cramer
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