Microsoft Takes $900 Million Writeoff on Tablet

July 18, 2013, 5:15 PM

Microsoft Takes $900 Million Writeoff on Tablet

By Don Clark

Microsoft took a $900 million charge related to slashing the price of its struggling Surface RT tablet, contributing to fourth-quarter results that missed revenue and profit expectations by a wide mark. The software giant, which also cited effects of the soft personal computer market, reported earnings per share excluding the Surface writedown of 66 cents a share, well below Wall Street expectations on that basis of 75 cents. It reported revenue of $19.9 billion, compared with analyst expectations of $20.7 billion. Microsoft’s shares tumbled 5% in after-hours trading on the news to $33.55, off $1.89.Amy Hood, overseeing her first earnings announcement since becoming chief financial officer recently, acknowledged that the company was not satisfied with its performance.

“I want to be very clear: We know we have to do better, particularly on mobile devices,” she said in an interview.

Chief Executive Steve Ballmer last week announced a sweeping reorganization of the company, which is aimed partly at increasing the company’s momentum in tablets and smartphones.

Rick Sherlund, an analyst with Nomura Securities, said the news was surprisingly bad across the company, with nearly all of the business units missing the company’s prior expectations.

“It was a whiff across the board,” he said. “It’s the fourth quarter in a row that they’ve missed their guidance for the major segments of their business.”

For example, Microsoft’s sales of products that run on company server systems–lumped into what it calls its “server and tools” business–grew 9% in the period. But Wall Street had expected growth of 12%, Sherlund said.

The effects of slumping PC sales were most apparent in its Windows division. Microsoft said revenue grew 6% in the period, but fell 6% if deferred revenue associated with a promotion for the company’s new Windows 8 software is excluded.

Microsoft has been forced to grapple with user gripes about Windows 8, which was released last fall. The company is planning to update the software soon to address those issues with a version dubbed Windows 8.1.

Meanwhile, Microsoft’s business division–which includes its popular Office applications–grew 14% in the period, but only 2% if the effects of an Office upgrade offer are excluded.

Microsoft introduced the Surface tablet line last year, a surprise move into hardware that upset some PC makers that are customers for its operating systems.

The company recently announced plans to cut the price of the Surface RT version of its tablet line by as much as 30%, amid signs that few buyers are opting for the hardware and underlying software that don’t run earlier Microsoft applications. Another version, called the Surface Pro, uses a different variety of computer chips and Windows 8 and is compatible with earlier programs.

The writedown, which came to 7 cents per share, reflected costs associated with making the price move and writing down the value of associated components, Hood said.

Hood said the company’s momentum among enterprise remains good, but Microsoft realizes it needs to kick other parts of the business into a higher gear. “This journey is going to take some time, but I believe we are making incremental progress,” she said.

Microsoft reported a rare quarterly net loss in the year-earlier period because of a one-time charge associated with its online division, which includes the Bing search engine business and MSN Web portal. It swung to a net profit, as expected, in the period ended June 30.

Microsoft’s net income totaled $4,96 billion, or 56 cents a share, including the Surface RT writedown. In the year-earlier period, its net loss was $492 million, or six cents a share. The company’s revenue was up 10% from the $18.06 billion reported in 2012.