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Beneath the Surface, a Difficult Q4 for Microsoft

Beneath the Surface, a Difficult Q4 for Microsoft
By Seth Fitzgerald

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The Surface was seen as a way to offset the market shift from PCs to tablets. However, in the December and March quarters, Microsoft was only able to sell 900,000 Surface tablets, which instead of bridging the revenue gap expanded it. Even the recent $150 drop in price for Surface tablets is unlikely to boost sales enough.
 


Microsoft's Surface tablet failure combined with declining industry PC sales resulted in the company missing expectations with its fourth-quarter financial report, which drove its share value down by more than 6 percent.

Microsoft CFO Amy Hood sought to calm investors by citing the technology giant's recent reorganization.

"We know we have to do better and this is one reason we made the strategic and organizational changes last week," Hood said in a conference call. "We are confident we are moving in the right direction."

During Q4 Microsoft's revenue grew by 10 percent, reaching $19.9 billion, although a $900 million charge for the Surface RT hurt that growth.

Where It Went Wrong

Computer sales have taken a turn for the worse for most PC manufacturers, and that decline has affected Apple, Intel, and of course, Microsoft. While Microsoft does not manufacture traditional PCs, the decline affected its software and accessory sales.

The Surface was seen as a way to offset the market shift from PCs to tablets. However, in the December and March quarters, Microsoft was only able to sell 900,000 Surface tablets, which instead of bridging the revenue gap expanded it.

Even the recent $150 drop in price for Surface tablets is unlikely to boost sales enough. Hood said she remained hopeful the Surface would gain traction.

"We believe this price decrease will accelerate Surface RT adoption and position us for better success," she told investors and analysts.

Unearned revenue was also a big factor in the disappointing Q4 report, due to Microsoft holding numerous long-term deals that will not yield any income for a while. Those deals are valued at $22.4 billion.

The Reorganization Solution

In an e-mail sent to employees last week, CEO Steve Ballmer announced the largest reorganization of Microsoft in more than a decade. The changes Ballmer enacted include a stronger focus on developing hardware and services as well as more attention on the mobile computing division of Microsoft.

The new Microsoft organization will be broken into Operating Systems Engineering, Devices and Studios Engineering, Business Development and Evangelism, and Cloud and Enterprise Engineering. All of the new business units have a primary goal of "working to transition this business into the modern era," Hood said.

If Microsoft is able to roll out new mobile products on a regular basis it will succeed, but if it stays fragmented with its execution it will continue to struggle in the current market. Another major concern for analysts and investors is Microsoft's execution of Windows 8, which placed more emphasis on touch controls that made the user experience awkward on a traditional PC.

No matter what ends up happening, Ballmer and the rest of the Microsoft executives have a long road ahead of them to compete in the current consumer electronics market.
 

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