Microsoft Takes $900M Charge on Surface Flop
July 18, 2013 6:40 PM
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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: At least MS is trying new things
7/20/2013 12:37:55 AM
Randomly trying new things is a great way to lose money. Companies pay big bucks to employ people with good business sense and good ideas. Microsoft doesn't have that right now. They're increasingly making products that customers simply don't want.
The main reason for it is hubris. They've forgotten who gets to dictate the direction of the industry- it's the customer, not the company. IBM tried to steer customers toward the PS/2 when the customers and the rest of the computer industry wanted to continue down the PC compatible route. This is what enabled Microsoft to really get established in the first place. Now they're making the same mistakes IBM did.
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