Microsoft's Q4 unravels, Surface RT bet flops

Microsoft's Q4 unravels, Surface RT bet flops

Summary: Microsoft's fourth quarter financials missed estimates and the software giant was left holding the bag on Surface RT units.

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Microsoft's fourth quarter earnings and sales missed expectations by a wide margin as the PC market slowdown and a writedown of Surface RT inventory painted a bleak picture.

The company reported fourth quarter earnings of $4.97 billion, or 59 cents a share, on revenue of $19.9 billion. The results include a $900 million inventory writedown for Surface RT that amounts to 7 cents a share. 

Wall Street was expecting Microsoft to report fourth quarter earnings of 75 cents a share on revenue of $20.73 billion. For the year, Microsoft reported earnings of $2.58 a share on revenue of $77.85 billion.  

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There may be a few nuances in the numbers. Consensus estimates include the Office Upgrade Offer, but not the Surface inventory adjustment. If you balance those two items out, Microsoft's fourth quarter earnings would have been more like 66 cents a share. 

Meanwhile, Microsoft's Surface RT writedown is primarily attributed to price cuts earlier this week as well as increased distribution. 

But no matter how you slice it Microsoft was walloped. Amy Hood, CFO of Microsoft, said the results were "impacted by the decline in the PC market", but the enterprise business was strong.

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The quarter for Microsoft reflects a tale of two companies---an enterprise side that's killing it and a Windows part that's struggling to regain its footing as tablets cannibalize PCs.

For instance, Microsoft's Windows division reported operating income of $1.1 billion, down from $2.42 billion a year ago. Microsoft's online services division cut its operating loss to $372 million, a drastic improvement from last year's loss. In addition, Microsoft's entertainment and devices division also lost money---dropping $110 million in the fourth quarter.

On the enterprise side, Microsoft has a much better story. The servers and tools unit had fourth quarter operating income of $2.35 billion on revenue of $5.5 billion. The business division, think Office, had operating income of $4.87 billion on $7.2 billion.

Clearly, the enterprise side of Microsoft is carrying the team.

Among the key items in the fourth quarter:

  • Microsoft noted that it was seeing increasing consumer demand for cloud services such as Office 365, Outlook.com and Skype.
  • Office 365 on an annual revenue run rate of $1.5 billion.
  • SQL Server and System Center both had double-digit revenue growth.
  • Microsoft said its expense guidance to $31.3 billion from $31.9 billion for the fiscal year ending June 30, 2014.
  • For the year, Microsoft spent $10.41 billion on research and development, up from $9.81 billion for fiscal 2012.
  • Total cash, cash equivalents and short-term investments was $77.02 billion as of June 30.

 

Topics: Microsoft, Enterprise Software, Windows

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188 comments
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  • Oh where Oh where is Loverock Davidson and Toddbottom3

    To try and tell us all how much of a success . Stuck with a mere $900,000,000 in obsolute inventory......

    NO TOTAL FAIL THERE .....JUST A COMPLETE FAILING

    Wait tilt the FAILING numbers come out on W-8.1......than how will they spin it.......NOT
    Over and Out
    • shush!!!

      Windows 8 is the best... MSFT fanboys told me so.
      tatiGmail
      • windows 8 different interface

        windows 8 different interface from all their other OS was/ is the downfall of Microsoft. I will never buy another OS from them until Win 7 classic is offered again. I can't have 2 different Interfaces in the office. Why would they change the best interface that grew over 20 years. Fire everyone involved, get the Win 7 peeps back. I really hate windows 8, I still can't find things, stuff pops up I don't want. Failure. Had I known I never would have upgraded 1 of my computers last November.
        hd82fxs@...
        • dont worry.....

          We will soon be in the post-Win8 era.....
          The Central Scrutinizer
          • 8 killed the PC market and 8.1 is butt a joke

            Everybody is going to hate 8.1 when they realize that Microsoft did NOT bring back the start menu. The a**h***s only brought back the start button that takes you to the same old crappy Metro sh**.
            tjordanchat
          • tjordanchat.....I see your testing 8.1 also

            We'll know in another 30 days/45 if they make enough positive changes to make much of a difference.

            Flashing tiles always makes me think they re trying to sell me something or another
            Over and Out
          • REad the market feedback...

            People that wanted "things back" overwhelmingly asked for the start BUTTON, only a very small (insignificant) percentages asked for the Start Menu...

            It is also interesting to note, that very few "fulltime" users ake use of either, since hitting the WindowsKey then the first few characters of the program name is so much faster, and has been the preferred method (look at the telemetry numbers!) for years.
            TheCPUWizard-2011
        • this comment just points to how important backwards compatibility is

          I agree with the sentiment behind this comment.

          The last thing a business person wants is to retrain his employees without getting a return on that investment. Microsoft's biggest problem, IMHO, is a failure to respect how important backwards compatibility is. If it were my decision I would allow the customer to select which desktop environment they wish to run in; then the user can select if they want the newest or most familiar path to computing. As a business person I should be able to lock in my policies to a particular (software) standard which simplifies training and avoids odd problems that come up from running software in different environments.

          I still prefer older versions of Office which permit me to do my work more efficiently than the current bloated offerings.

          With that said: Microsoft has won this war time and time again; the world moves on and the old, sometimes better software just dies a slow death.
          Ken_SF
          • Backwards compatability costs!

            And the cost is not insignificant. A large number of products have failed over the years simply because the cost of keeping backwards compatibility prevented innovation. A new company was able to step in with something freash and new, because they did not have these constraints and clobber the original vendor....
            TheCPUWizard-2011
        • Can't find things?

          What are you a nub?
          bobjones2007
          • No...

            He is a former buyer that isn't buying any more. His reasons need not meet your requirements, he is voting with his wallet and in the business world...
            NoAxToGrind
        • Well Said

          Windows WAS the BEST interface for the last 20 years. Windows 8.x and future versions of Unity and Metro can all go to the junk yard.
          Bobby Edge
        • Yak Yak Yak

          Running Windows 8 desktop, running Windows 8 Surface Pro, running Office 2013 Pro Plus on both, have an Asus Android Tablet, using an iPhone, spouse uses an iPhone, she also has an iPad2. Would not buy a Windows RT for myself for the same reason I did not buy another iPad. I need system that provided BOTH data consumption and data entry. Microsoft has that, others don't. With the addition of SkyDrive for iPad and iPhone, Skype everywhere, OneNote for iPad and iPhone, and now Office for iPad and iPhone 4s and later... Windows and Microsoft are really working toward access anywhere. The Mac and Linux crowd are still just haters. Don't be a hater move on.
          David@...
          • Have to Agree

            with your wRT comment. I am trying to figure out what to do. I'd like a Surface Pro (with Haswell) but it really is expensive.

            Thinking of a laptop and different OS on inexpensive 10" tablet, but seems like everything has it's limits as far as OS compatibility.

            Might wind up with a W8.1 Laptop + wRT. Can save $400 and if I need real windows programs just use TeamViewer to my Trusty W7 Desktop.

            After going round and round beginning to wonder why I need a tablet if I have a good laptop. Seems like it's one of those wannabe things for me...

            I have time, sure is fun not being forced into a bad decision. One thing for certain, iStuff is not my direction for sure.
            RayInLV
        • @hd82fxs

          True that.

          I am now very fluent at using Windows 8 (used at work) but I just can't do as much and as fast and as effectively as I do at my home on my Win 7 Professional.
          Windows 8 UI is just ineffective, does not help efficiency, too many hops and "short" cuts to do what in Win 7 you do with few clicks (and you also have the shortcuts to boot).
          dfumagalli@...
          • A click is slower...

            The time taken to move your hands out of the typing position, grab the mouse, position itn, then click and then return your hands back to a typing position is the real time killer.
            TheCPUWizard-2011
    • Microsoft new theme song for Windows

      Here a FLOP...There a Flop...Every where a Flop.Flop....Flop ...Flop.....
      Over and Out
      • Hey

        Flop, that rimes with Elop! Actually, they're kind of the same aren't they! :-)
        slickjim
      • You should change your name to nothing to say

        but what the heck, it's probably the 007th time you've heard that :)
        William Farrel
        • Re: You should change your name to nothing to say

          Then, what do you have to say, Mr. Farrel about the Surface RT being a flop, that Microsoft admitted?

          Or whom should we believe? You, or your master?
          danbi