Microsoft Feels BlackBerry's Pain

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With the PC market still struggling, it's no shock that Microsoft's (NASDAQ: MSFT  ) fiscal fourth-quarter earnings left investors wanting more. Total revenue was $19.9 billion, which translated into net income of $5 billion, or $0.59 per share. A year ago, the company had posted its first net loss as a public company of $492 million, primarily due to the massive aQuantive writedown.

This time around, it was a growing inventory of Surface RT tablets that had to suffer an inventory charge to the tune of $900 million. The Surface RT inventory adjustments hurt Microsoft's bottom line by $0.07 per share. Still, even without the charge, Microsoft would have fallen short of the $0.75 per share consensus estimate that investors were hoping for.

Investors might remember when BlackBerry took a similar charge in 2011 from its glut of unsold PlayBooks. The Canadian company took a $485 million charge just months after launching its seven-inch tablet. Microsoft now feels BlackBerry's pain.

That's nearly $1 billion that Microsoft is eating as a result of slow Surface RT sales, and was the driving factor for the precipitous rise in cost of revenue that subsequently hurt gross margins. Gross profitability fell from 77% a year ago, to 72% last quarter.

Microsoft has made numerous moves so far this year to get Surface RT units moving. In June, the company began offering the device to educational institutions for as little as $199, and subsequently reduced retail prices by $150 this month. That brought the entry-level Surface RT price from $500, to $350.

The company likely decided to go ahead and take the charge early and book it into its fiscal fourth quarter, as it was planning to discount the device.

There were reports last year that Microsoft was hoping to sell 3 million to 5 million units in the fourth quarter alone, ordering up ingredients from component suppliers. Microsoft doesn't disclose unit sales, but IDC pegged the software giant's Surface channel shipments in the fourth quarter at just 900,000.

Regarding Microsoft's ambitions to become a devices-and-services company, the "devices" part of that equation isn't going so well.

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  • Report this Comment On July 19, 2013, at 8:27 PM, iphonerulez wrote:

    Microsoft has plenty of stockpiled cash so I doubt this $900 million charge will have as much affect on Microsoft as the $485 million charge did on BlackBerry. BlackBerry was a one-trick pony, Microsoft is not. By next quarter, no one will even remember this $900 million charge as Microsoft's share price bounces back up. The institutional investors have great love for this company and they'll continue to stick with it for the dividends.

  • Report this Comment On July 19, 2013, at 9:28 PM, Coopmv wrote:

    I have been watching with dismay how Ballmer has been missing one big opportunity after another over the past decade. Bill Gates would have foreseen the importance of mobile computing while Ballmer clearly had not. Zune could have been a worthy competitor to iPod had it been marketed and supported properly. There is no reason Windows 8 cannot be the third ecosystem for mobile computing, i.e. smartphone and tablet since Microsoft has some very valuable productivity software in Office, which neither Apple nor Google can offer.

    Now it looks like activist shareholder is on the move after the latest dreadful earning has been reported. Perhaps some much needed change will happen, including a change of leadership at the top.

  • Report this Comment On July 20, 2013, at 4:36 AM, melegross wrote:

    iphonerulz, what investors are concerned about is not the $900 million per se, but what it represents. That is, Microsoft isn't selling tablets. As Ballmer is remaking Microsoft as a Services and Devices company, when the devices portion fails to sell, then that's serious news indeed. It could have major repercussions on their future success.

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