surfaceblackMicrosoft just reported its quarterly financial results, including a $900 million charge for “inventory adjustments” of its Surface RT tablet, following widespread price-cutting after the company’s iPad rival didn’t live up to its early expectations.

The company reported earnings of 59 cents a share, when including the 7 cent charge for the Surface RT. Adjusting for that charge, the company’s earnings would have been 66 cents per share — still significantly lower than the 75 cents that Wall Street analysts had been expecting in advance of the report.

Revenue in the closely watched Windows division was $4.4 billion — a 6 percent decline after adjusting for a revenue deferral taken in the same quarter a year ago.

“While our fourth quarter results were impacted by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter. We also saw increasing consumer demand for services like Office 365,, Skype, and Xbox LIVE,” said Amy Hood, Microsoft’s new chief financial officer, in the company’s earnings release.

She added, “While we have work ahead of us, we are making the focused investments needed to deliver on long-term growth opportunities like cloud services.”

Microsoft’s Surface RT is the version of its tablet based on energy efficient ARM processors, theoretically going head-to-head with the iPad. Over the weekend, Microsoft dropped the price on the 32GB tablet from $499 to $349. The 64GB device also got a price cut, dropping to $449. This followed deep discounts and giveaways in the education market, in what has been perceived as a strategy to clear out inventory in advance of a new version.

Shares of Microsoft are down almost 5 percent in after-hours trading. The company’s overall revenue for the quarter was $19.9 billion, also missing analysts’ estimates of $20.7 billion.

Update: Asked about the Surface RT price cuts, Microsoft’s director of investor relations Lisa Nelson said via phone, “We believe that it will accelerate Surface adoption and better position us for long-term success,” she said. However, she declined to say whether the move was in anticipation of a new version of the Surface RT. She noted that the results also include a write-off of related parts and accessories, such as the Surface keyboards that go along with the device.

In the Windows business, Nelson said business PCs actually returned to modest growth this quarter, but the consumer market for Windows PCs continues to suffer.

Microsoft’s earnings conference call begins at 2:30 Pacific time, available for streaming here.

Follow-up: Microsoft’s new CFO concedes, ‘This journey will take time.’

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  • jdrch

    The faster MS realizes RT is a mistake and drops the product, the better. Not only is Windows 8*’s strength most fully realized in the full version, but RT devices are crippled compared to Windows full version devices. Oh, and then there’s that “consumer confusion” thing.

    • Long Pham

      RT is not a mistake. It is a big change, it just needs some time. I myself dont want to go with the first gen surface RT simply because of apps. But time will fix that

      • jdrch

        The RT concept itself isn’t a mistake, but selling devices for which that was only concept was a bad idea IMO. Clearly the price difference isn’t enough to sway buyers, + Haswell is here for Win8 anyway.

      • cory78

        heil ballmer. change does not meens automatically better. rt is a change that is targeted to benefit only ms, and users does not want that. time will fix, you can bet it, loss after loss, the end of microsoft will come.

    • scottcarmichael

      RT wasn’t the mistake, everything related to Windows 8 was the mistake. This “new” Microsoft since 2011/2012 has been just God-awful.

      • jdrch

        I wouldn’t call lower RAM usage and faster performance with no degradation in features a mistake. Personally I love Windows 8. I just don’t see the point of a standalone RT interface OS in a Haswell world.

        Also, Office 2013 & Visual Studio 2012+ are very, very good. So is Skype, which is part of the MS product family.

        • Guest

          Haswell is way too expensive though to compete with ARM. Also Office and Visual Studio are for enterprise, not consumer market. Microsoft seems doomed to become the next IBM.

          • jdrch

            @dfb76530a23548068b5c0b1ccbfe62c0:disqus They’re targeted at both markets, actually.

          • Guest

            Targeting something at a market and being relevant in said market are two completely different things. How many people can you see slurping their latte at Starbucks while firing up their Visual Studio on a tablet to crank out a new app? Apparently the appeal of Office to consumers isn’t really any different. Everything else is wishful thinking by softies.

    • BrandonLive

      I disagree. While they may have been overconfident in v1, they’ve built a lot of hardware muscle in a very short time. With 8.1 on the way and an inevitable hardware refresh (with a much needed speed boost at the RT end I’d bet), I wouldn’t count them (or RT) out just yet.

    • narg

      RT was not a mistake. Pricing it at $500 from the start was the mistake. If MS wanted the product to fly off shelves, it should have been $349 to start with. RT has a LOT of good, but need traction. Pricing is the only way it will get that traction.

  • cory78

    well deserved, Ballmer. try agin to force s… like Vistabob 8 to customers if you want to lose more money.

  • Bye Ballmer

    Yet another 900 million reasons to “reorg” Ballmer…

  • Maskeladden

    Why is Ballmer still in charge of Microsoft? He is too out of touch to be the one responsible to make sure Microsoft re-connects with the modern consumer.

    The ad for office 365 on buses around my city is a good example. It is a poster of passengers sitting on the bus with Surface Pro’s, being to connected to Office 365 with big smiles on their face because, as the slogan somewhat states, ‘you can now be in the office wherever you are’. Who connects having the office following you wherever you go with happiness?

    The Microsoft Surface ad is also terrible, where all these executives are break dancing around the conference table assembling/disassembling their surface’s left and right to mad tribal music. What is going on, seriously? Microsoft just comes across as that parent who is trying to be hip around his/hers kids and their friends, yet is doomed to fail as they misinterpret just about everything.

    Stop trying to sell us a lifestyle. Just tell us what your product does and how, and leave the rest to us.

    • Agent_Zeero

      What’s going on? The same thing they’ve always done. Microsoft builds products for themselves. Because lots of Softies ride the MS Connector bus to work, all the while reading email, or finishing up some PPT deck, they think that’s what everyone likes to do. “This is what I do, and I’m just like everybody else”. No, you’re not. You’re someone that eats, sleeps, and drinks technology. Joe Sixpack wants to go home, eat dinner, play with the kids, the relax watching TV, or surfing the Internet. Or both. He doesn’t dream of one day being able to do his job wherever he is

      • Guest

        Not the first time. A few years ago they had a Hotmail campaign touting how you can check mail on vacation.

        Products by softies for softies.

        • Stupid Trolls

          Right, because no one except MS employees check their mail on vacation. Wake up.

  • Guest

    What should be much more alarming than the Surface RT flop – something we all somehow knew might happen – is the dramatic decline of the operating income in the Windows division. Less than $1.1B from $2.4B for the same quarter the year before. Makes the Surface failure almost look like a welcome distraction.

    • Guest

      If you’re going to quote the financial reports, it would be an idea to fully understand them first.

      • Guest

        OK, enlighten us.

        • Guest

          Let’s start with the most obvious: $1.1B includes the $900M Surface RT write down.

  • darsh

    Surface would have been hit with thinner/wider console and a new OS designed specifically for tablets. Forcing Windows to be magic of all worlds has yet again proved to be disastrous and Ballmer will never get that.

  • josh

    Got a full Windows 8 version of the Surface the other day with the big price drop. It’s not too bad other than the fact that it’s super heavy for a tablet PC.

    • Ryan Parrish

      2 lbs is super heavy? You might want to start working out if 2 lbs is too much for you.

  • FabbJabb

    Sometimes you jsut have to roll that beautiful bean footage.

  • rt

    but Microsoft has spent millions on internet trolls commenting all over the internet that the surface was awesome. Obviously nobody believed the BS

    • narg

      And who paid you to Troll against them?

  • Guest

    You can’t make an omelette without breaking a few eggs. Notwithstanding the setbacks associated with generation-1 Mid-Function Tablets (MFTs), we believe the combination of price cuts on MFTs, upcoming MFT and FFT devices, and the overall lack of serious competition for the serious compuser market means that Microsoft will return to its previous financial levels of reliability and profitability.

    No consideration was exchanged for this posting. This posting does not represent the opinion of Microsoft or of any other corporation. Please do not reply to this comment; this thread will not be monitored.

    • Guest

      A bunch of MS employees who I normally respect are tweeting the same bullshit. Saying it was a v1 product, a new area for MS, and other assorted excuses is lame. The reality is this was an epic fuckup. MS didn’t throw this together. It spent THREE YEARS designing both Surface RT and Windows RT. The launch budget for Surface alone was more than half a billion dollars (the total W8 marketing budget was reported at between $1-1.5 billion). And yet they couldn’t even sell 3M units in an overall tablet market of >150M? If you look at the 4Ps of marketing they got all of them wrong. The Product, which from an overall hardware engineering perspective is very good albeit underpowered, was hobbled by a version of Windows that couldn’t run legacy Windows apps and confused customers, an immature app store that couldn’t make up the difference, first party apps that were so amateur as to be unusable, a USB port that supports few legacy devices (thereby negating what could have been a major advantage), limited enterprise features and a version of Office that wasn’t fully designed/optimized for touch and importantly didn’t support Outlook. The Place was initially just MS stores aimed at retail consumers, which was a ridiculously limited distribution plan, and occurred simultaneously with the release of W8, which only served to create more confusion. A much more logical strategy would have been to release Surface Pro first, targeting enterprise as well as consumers who needed Win32, build the brand, and then release RT when there were more Metro apps. If they were going to lead with RT, it still made sense to start with enterprises where MS has strength. But the lack of advanced business features and Outlook support made that virtually impossible. The Price was far too high and only really made sense if the intent was to appease OEMs and let them have first shot, but few of them put any serious effort into RT. Seeing that, MS should have taken a quick price cut and extended distribution right away. Instead they very slowly extended availability to retail and only recently cut the price. The Promotion was lame. While people dancing around with clicking keyboards may have won some advertising firm an award, it didn’t educate consumers on why they’d chose Surface RT over the iPad and Android tablets which by then had three years to define the market. MS still can’t make the case convincingly, though lately they’re at least trying to point out the advantages they perceive exist. And lately, based on the 8.1 feature set and their recent comments, they appear to be targeting the enterprise more directly, which again is smarter than trying to go head to head against iPad and Android tablets in consumer.

      People really need to stop making excuses for the repeated fuckups of MS and its management team. Nobody in the industry makes these kinds of massive mistakes on an annual basis without ever learning from it or being held accountable.

  • Guest

    Almost a billion dollar write off? After spending more than a billion on promotion? Absolutely ridiculous. This summer Ballmer and MS’s board are finally going to face the most serious shareholder challenge yet. And deservedly so.

    • Guest

      He should have been fired a very long time ago, but if they don’t do it now the board should be sued for gross negligence. He was already named worst CEO by Forbes a year ago! The last few years almost bordered on willful sabotage. World to MS board, take action for goodness sake!

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