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Microsoft stumbles in Q4, takes $900M Surface RT charge

The company missed profit and revenue expectations

By Juan Carlos Perez, IDG News Service
July 18, 2013 06:05 PM ET

IDG News Service - Microsoft closed its fiscal year with a less-than-stellar earnings report, missing Wall Street's revenue and profit expectations and taking a gigantic charge related to its Surface RT tablet sales.

Revenue came in at US$19.9 billion for the fourth fiscal quarter ended June 30, up 10 percent compared with $18.1 billion in the same quarter last year. Analysts polled by Thomson Financial had expected, on average, revenue of $20.7 billion.

Net income was $4.97 billion, or $0.59 per share, compared with a net loss of $492 million, or a loss per share of $0.06, in 2012's fourth quarter.

The results include a charge of $900 million, or $0.07 per share, related to Surface RT "inventory adjustments," a clear sign that the much-maligned tablet has had serious problems gaining traction among consumers and has been unable to compete well against the iPad.

The results also reflect the recognition of $782 million of previously deferred revenue related to the Office Upgrade Offer.

Adjusted for the Office Upgrade Offer item, pro-forma revenue would have been $19.1 billion and earnings per share $0.52, Microsoft said in a statement Thursday. Analysts had expected earnings of $0.75 per share.

That compares unfavorably with pro-forma revenue of $18.6 billion and earnings per share of $0.73 in 2012's fourth quarter, which excluded a huge charge for goodwill impairment of $6.2 billion related to Microsoft's Online Services Division.

CFO Amy Hood said in the statement that fourth-quarter results were affected by the PC market's continuing decline, but that the company is seeing continued strong demand for its enterprise and cloud computing products.

Other products that experienced strong demand during the quarter were Office 365, Outlook.com, Skype and Xbox Live, she said.

CEO Steve Ballmer said in the statement that the company is "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."

The Microsoft Business Division, which includes Office sales, had revenue growth of 14 percent year on year, or 2 percent when adjusted for the recognition of the Office Upgrade Offer deferred revenue. Office 365, the cloud suite of Office desktop and server products, is now on a $1.5 billion annual revenue run rate, the company said.

Revenue at Server & Tools grew 9 percent, helped by strong growth of SQL Server and System Center.

Windows Division revenue grew 6 percent, but excluding the impact of the Windows Upgrade Offer revenue deferral last year, quarterly revenue actually dropped 6 percent.

Microsoft plans to ship Windows 8.1, which is intended to address a number of issues for which Windows 8 has been loudly criticized, later this year.

The Online Services Division, which includes the Bing search engine, grew its revenue 9 percent.

The Entertainment and Devices Division had an 8 percent revenue increase, helped by Xbox Live sales growth of almost 20 percent.

On a conference call following the report, Hood said that the fourth quarter reflected the trends that affected Microsoft positively and negatively throughout the fiscal year, namely a faltering PC market that continues to hurt the Windows business and strong demand for the company's enterprise products and cloud services.

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