Microsoft's Earnings Take a Hit on Surface RT

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Despite declining PC demand and a $900 million write-off due to the company’s underperforming Surface RT tablet, Microsoft continues to post strong sales.

In a July 18 statement announcing Microsoft’s financial results for the fourth quarter and its entire 2013 fiscal year, chief financial officer Amy Hood noted the relative strength of her company’s business software and cloud services divisions.

“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, Outlook.com, Skype, and Xbox LIVE,” she said.

During the fourth quarter, which ended June 30, 2013, Microsoft booked revenues of $19.90 billion, a 10 percent increase over the same year-ago period, but missing analyst estimates of $20.72 billion. Microsoft reported operating income, net income and diluted earnings per share of $6.07 billion, $4.97 billion, and $0.59 per share, respectively. Analysts were expecting $0.75 per share.

Microsoft fell short due to the company’s Surface RT woes, in part.

The slow-selling tablet forced the Redmond, Wash.-based software maker to take a $900 million charge. Microsoft launched Surface RT — an ARM-powered device that is incompatible with x86-based Windows software — alongside Windows 8 in October. While sleek and packed with innovative touches, it failed to make much of a mark on the tablet market or put a dent in sales of Apple’s popular iPad.

“We reduced the price of Surface RT by $150 to $349 per device. As a result of this price change, as well as inventory adjustments for related parts and accessories, we recorded a $900 million charge to our income statement. While this resulted in a -$0.07 impact on earnings, we believe this pricing adjustment will accelerate Surface RT adoption and position us better for long-term success,” stated Hood during a conference call to discuss the company’s finances.

For fiscal year 2013, Microsoft’s revenues rose 3 percent year-over-year to $77.8 billion. Operating income hit $26.76 billion and diluted earnings reached $2.58 per share.

The company’s cloud and enterprise software offerings have proven strong contributors to growth. Revenues at its Business Division revenue jumped 14 percent for the fourth quarter and 3 percent for the year. “Office 365 is now on a $1.5 billion annual revenue run rate,” boasted the company in a statement.

Driven by demand for SQL Server and System Center, Server and Tools revenues grew 9 percent for both the fourth quarter and the full year. “SQL Server revenue grew 16 percent, and again outpaced the broader market, announced Chris Suh, general manager of Investor Relations for Microsoft, during the call.

Pedro Hernandez is a contributing editor at Datamation and InternetNews.com. Follow him on Twitter @ecoINSITE.