Microsoft took a big write-down on its highly touted but
poorly adopted Surface tablet last quarter, causing the company to badly miss
Wall Street analysts' profit expectations.
The Redmond, Wash., based software giant said Thursday that its
fiscal fourth-quarter net income rose to $5 billion, or 59 cents per share.
Analysts polled by Thomson Reuters forecast Microsoft (MSFT, Fortune 500) earnings of 75 cents per share.
Sales rose 10% to $19.9 billion, also falling far short of the $20.7 billion
analyst had forecast.
Results were negatively impacted by a whopping $900 million
write-off of Microsoft's Surface RT inventory. Microsoft recently knocked $150
off the price of the tablet, which debuted in October and initially sold for
$500. It is the first PC designed by Microsoft, but the company says its own
devices will become a big part of the company's strategy going forward.
Shares of Microsoft fell 6% in after-hours trading.
Following the sweeping reorganization of the company earlier in July, which no longer
divides Microsoft's business units according to specific products, the
challenge for the company's management will be to strengthen that devices side
of its operations.
Devices boss Julie Larson-Green faces a host of challenges to
get that job done. First, she'll have to help produce a Surface tablet that can
transition Microsoft into the post-PC market amid slumping PC sales. She also must also fix the
current public perception of the Xbox One video game console, which has been a
PR nightmare for a variety of reasons, ranging from privacy snafus to digital
rights management of content.
With the Surface failing to catch on, software chief Terry
Myerson must figure out where the Windows RT platform -- a variant of Windows 8
designed for tablets -- fits into Microsoft's future strategy. In addition to
the shortcomings of the Surface RT, few hardware partners supported the
platform when it was introduced last year. Lenovo, Samsung and others have
since stopped producing RT devices.
Microsoft hasn't helped its cause by failing to properly explain
what differentiates Windows RT from Windows 8. As a result, hardware makers
have largely settled on Intel-based hybrid devices that are neither great
tablets, nor great PCs, which hurts Microsoft's Windows strategy. Acer, for
example, recently released the first eight-inch Windows tablet opting to use Windows 8 instead of the RT
platform -- a stinging blow to Microsoft's RT hopes.
Still, Microsoft's director of Investor relations Lisa Nelson
says that Microsoft is fully committed to Windows RT, pointing out a three-fold
increase in the number of markets where Surface RT is available since last
year.
Microsoft CEO Steve Ballmer also touched on the importance of
devices for Microsoft going forward.
"We are working hard to deliver compelling new devices and
high value experiences from Microsoft and our partners in the coming months,
including new Windows 8.1 tablets and PCs," said Microsoft CEO Steve
Ballmer, in a prepared statement.
Microsoft is placing most of the blame for its performance on
slumping PC sales, but is still encouraged by business from its corporate
customers and results from many of its services.
Though Microsoft had little to offer on Skype financials, it did
mention that usage of the service is higher than ever. Microsoft also said it
is still encouraged by Xbox Live subscription sales.
Microsoft says its Office 365 service is growing at a
satisfactory rate with 1.5 million subscribers and expects Office to be
successful in the long term. But excluding deferred revenue from a recent
upgrade offer, Office sales would have plummeted 27% last quarter.
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