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Microsoft Profit Misses Estimates Amid Surface Writedown

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By Dina Bass, courtesy Bloomberg —

Microsoft Corp. (MSFT) took an unexpected writedown of $900 million on its inventory of unsold Surface tablets, further reducing earnings already hurt by shrinking demand for personal computers running Windows.

Fourth-quarter profit was 66 cents a share, excluding a 7-cent charge related to the inventory adjustment, Redmond, Washington-based Microsoft said in a statement today. Sales rose 10 percent to $19.9 billion. Analysts had predicted profit of 75 cents a share on $20.7 billion in revenue, according to the average of estimates compiled by Bloomberg.

Chief Executive Officer Steve Ballmer released Surface, along with a new version of Windows, in October to stem the loss of consumers to mobile devices that offer many of the same features as laptops and desktops. The new products have failed to ignite demand. PC shipments fell 11 percent last quarter, according to Framingham, Massachusetts-based IDC.

“This is because of the triple whammy of the economy, tablets and Windows 8,” said Frank Gillett, an analyst at Forrester Research Inc. (FORR) in Cambridge, Massachusetts.

Surface, Microsoft’s first-ever computer, is selling poorly. Just 900,000 units were shipped in the December and March quarters, according to IDC. Microsoft cut the price on one version, Surface RT, this week.

Microsoft fell as much as 6.4 percent in extended trading. The shares declined less than 1 percent to $35.44 at the close in New York. The stock is up 33 percent this year, compared with a 18 percent increase in the Standard & Poor’s 500 Index.

Management Revamp

Intel Corp. (INTC), the largest semiconductor maker, yesterday forecast third-quarter sales that may fall short of some analysts’ estimates as the PC slump also erodes its largest business. Earning reports from Apple Inc. and Qualcomm Inc. are also expected to underscore the shift to mobile devices.

Microsoft Chief Financial Officer Amy Hood said consumer PC shipments dropped 20 percent in the quarter. That also hurt sales of Office software, she said.

“We know we have to do better, particularly on mobile devices, and so that’s a big reason we made the strategic and organizational changes we made last week,” she said in an interview. Asked how long it will take for Microsoft’s position in tablets to make up for the contracting consumer PC market, Hood said: “It will take a long time for that to happen.”

Net income for the fiscal fourth quarter was $4.97 billion. The company reported a net loss of $492 million a year earlier, which included a $6.2 billion writedown related to Microsoft’s 2007 acquisition of AQuantive Inc.

Business Units

Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $22.4 billion, compared with the $21.8 billion average projection, according to analysts’ estimates compiled by Bloomberg. Revenue was boosted by the recognition of $782 million deferred from previous quarters related to coupons for Office upgrades.

Ballmer is reorganizing the world’s largest software maker to try to spur better performance in areas like mobile computing as consumers gravitate to tablets and smartphones. The biggest reorganization of Microsoft in a decade, announced last week, is designed to speed development of hardware and services as the company’s Windows business continues to suffer.

The revamp may result in changes in how Microsoft reports earnings for its various units, Hood said in a conference call last week. Microsoft previously had eight business units and reported earnings broken into five groups. It now has four product-engineering units and hasn’t said how it will handle earnings for the new structure. Today’s report is the first being handled by Hood, named in May to replace Peter Klein.

Weak Windows

“They’ve got three different headwinds pushing on them, which is why they did the reorganization last week,” Gillett said. “Looking at the progress of this quarter, I bet they wished they did it a year ago.”

Microsoft has said it has sold more than 100 million copies of Windows 8. The company is currently testing a new version that adds features and addresses some customer complaints about the design. It’s also working with computer makers to get more machines in stores with touch screens and lower prices. Microsoft reduced its forecast for operating expenses for the year that started July 1 to $31.3 billion to $31.9 billion.

“The scale and complexity of the Windows ecosystem means this journey will take time but we are making incremental progress,” Hood said.

Windows sales are being besieged by poor demand for PCs, reflected in five consecutive quarters of declining shipments, which researcher IDC predicts will be the worst annual drop on record. Sales in the Windows unit were $4.4 billion, below the $4.8 billion average estimate of analysts polled by Bloomberg.

“Consumer PCs remain pressured,” said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle who rates the shares a hold. “Consumers are buying smartphones and tablets. Microsoft has launched some products in those areas but hasn’t made much headway. They’re late to market, and they’re not competitively priced.”

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This entry was posted on July 18, 2013 by in MICROSOFT.

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