Microsoft takes $900M charge for Surface RT tablets in disappointing earnings

Microsoft’s fourth quarter earnings sure look ugly, with missed analyst expectations and the company taking a $900 million charge on its Surface RT tablet inventory.

The company has made a lot of big moves recently with its massive reorganization a week ago that took steps to better unify the company and get it back on track.

Now with today’s earnings we can see why Microsoft so dramatically put these moves into place. Microsoft posted disappointing earnings with revenue of 52 cents per share on revenue of $19.90 billion. The highlight of the report appears to be a reported profit of $4.97 billion.

These results missed analyst expectations. Analysts surveyed by FactSet expected to see earnings of 75 cents a share on revenue of $20.72 billion.

One of the most interesting points in today’s earnings is that Microsoft is taking a $900 million charge for their Surface RT tablets. Microsoft describes this as “inventory adjustments.” Notably, Surface RT tablets saw a steep $150 price drop recently.

On top of the $900 million charge, Microsoft noted that its earnings were impacted by “$540 million of previously deferred revenue related to the Windows Upgrade Offer, and a $733 million expense related to the European Commission fine.” Those both were previously addressed but they still hurt when you add all of these write-downs together.

During the past several quarterly earnings, Microsoft’s revenue has fluctuated wildly. But today’s earnings fall into relatively normal levels versus the past few years’ worth of earnings. (See chart below.)

Here’s how Microsoft broke down its performance by business unit. (This will be the last time Microsoft reports using these business units now that it has unified the company into a new organization design.)

Microsoft Business Division revenue grew 14 percent for the fourth quarter and 3 percent for the full year. Adjusting for the recognition of previously deferred revenue related to the Office Upgrade Offer, Microsoft Business Division non-GAAP revenue increased 2 percent for the fourth quarter. Office 365 is now on a $1.5 billion annual revenue run rate.

Server & Tools revenue grew 9 percent for the fourth quarter and 9 percent for the full year, driven by double-digit percentage revenue growth in SQL Server and System Center.

Windows Division revenue grew 6 percent for the fourth quarter and 5 percent for the full year. Excluding the impact of the prior year Windows Upgrade Offer revenue deferral, Windows Division non-GAAP revenue decreased 6 percent for the fourth quarter and 1 percent for the full year. In June, Microsoft released the public preview of Windows 8.1 which will be made available to OEMs in August.

Online Services Division revenue grew 9 percent for the fourth quarter and 12 percent for the full year, driven by an increase in revenue per search and volume. Bing organic U.S. search market share was 17.9 percent for the month of June, up 230 basis points from the prior year period.

Entertainment and Devices Division grew 8 percent for the fourth quarter and 6 percent for the full year. During the quarter, transaction revenue within Xbox Live grew nearly 20 percent, and we unveiled our next-generation gaming and entertainment console, Xbox One.

The big winner among these units is the Business Division, which is up 14 percent year over year. Office 365 sales appear to be robust with more than 1 million users on 365 Home Premium, and now 365 is on track to earn Microsoft $1.5 billion in annual revenue.

Microsoft’s stock is down about 5 percent in after-hours trading on the news. As of this writing, it is down about 5.1 percent to $33.60 per share.

Check out Microsoft’s stock price at close today versus some of its biggest competitors in the chart below.

MSFT data by YCharts