Shrinking Windows Business and Soft Surface RT Sales Hurt Microsoft

The meltdown in the PC business has finally caught up with Microsoft. While the company has missed expectations four times out of the last five quarters, analysts and investors gave Microsoft a pass. In fact the company's stock has appreciated nicely in recent months.

But yesterday's worse-than-expected fourth fiscal 2013 quartery report showed Microsoft can no longer hide from the shrinking PC business, with Windows revenues declining 6 percent for the quarter and 1 percent for the entire year (take into account an upgrade offer and revenue deferral affected the numbers). Putting that aside, Microsoft said Windows Division revenues increased 6 percent for the quarter and 5 percent for the year.

While it's certainly no surprise that Microsoft's Surface devices, especially those based on Windows RT, have failed to make a dent in the rapidly growing tablet market, Microsoft's $900 million charge hit the company where it hurts and some analysts on last night's earnings call sounded put off by the surprise. Microsoft said it took the charge after slashing the price of the devices by as much as 33 percent.

The revenue and earnings miss are hitting Microsoft shares hard -- near midday they were down over 10 percent. Presiding over her first earnings call as Microsoft's new CFO, Amy Hood said Microsoft believes the price cuts for Surface RT "will accelerate Surface RT adoption and position us better for long-term success."

Certainly cutting the price could help but what will more likely accelerate Surface RT and Surface Pro for long-term success will be the next crop of devices based on improved processors and storage, longer battery life and more popular apps in the Windows Store. Reading between the lines, it appears new Surface devices are coming. Microsoft is also counting on a fresh crop of systems from OEMs based on Intel's long-awaited Haswell processor that will address the shortcomings in the higher-end devices.

Hood pointed to last week's major reorganization of the company -- dubbed One Microsoft -- the planned release of Windows 8.1 and a pipeline of new devices and services will lead to improved results. The company will hold an analyst meeting in September to spell out how Microsoft will grow its business and provide further details on the reorganization, Hood said.

Yesterday's news wasn't all bad. The Server and Tools business posted $5.5 billion in revenues, up 9 percent, driven by System Center (up 14 percent), SQL Server (up 16 percent) and a 25 percent increase in Windows Azure customers. But that was obscured by the overall bad news, which resulted in quarterly revenues of $19.2 billion, up 3 percent year-over year but falling short of the estimated $20.73 billion. Earnings per share were only $0.59 cents, falling way short of the $0.75 analysts had forecast.

Hood acknowledged that "we have to do better" to gain share in the tablet and phone market. "With over 1.5 billion Windows users around the world, a transition of this magnitude takes time," she said. "We're confident we're moving in the right direction."

Are you as confident as Microsoft is? Comment below or drop me a line at [email protected].

Posted by Jeffrey Schwartz on 07/19/2013 at 1:15 PM