Microsoft Profit Misses as Surface Tablets Languish; Shares Drop

The stock fell 5 percent after hours from 5-year highs.

The massive charge underlines the struggles of the world's largest software company, which last week announced a deep reorganization to transform itself into a "devices and services" leader, but is struggling to make mobile computing as attractive as Apple Inc or Google Inc.

"That's the biggest miss we've ever seen from Microsoft, the biggest that I could remember," said Brendan Barnicle, an analyst at Pacific Crest Securities. "It looks like everything was weak."

Before the sell-off late Thursday, Microsoft shares had risen 32 percent this year, beating a 19 percent rise in the Standard & Poor's 500 index.

Microsoft said the $900 million charge was related to its Surface RT tablet, the version of its tablet running on ARM Holdings-designed chips. The Surface was meant to challenge Apple's iPad when it was launched alongside Windows 8 in October, but has not sold well.

Earlier this week, Microsoft said it was drastically cutting prices and expanding distribution of the model to entice buyers, reducing the value of Surface devices in its inventory.

"We do know we have to do better, particular in mobile devices," Amy Hood, Microsoft's new chief financial officer, said in a telephone interview. "That's a big reason we made the strategic organizational changes last week."

Microsoft's biggest shake-up in five years, unveiled by Chief Executive Steve Ballmer last week, creates a single devices unit for the first time at the company, suggesting that it will double down on its so-far unsuccessful move into hardware.

Redmond, Washington-based Microsoft reported fiscal fourth-quarter profit of 59 cents per share, compared with a 6 cents per share loss in the year-ago quarter when it wrote off the cost of a failed acquisition.

Wall Street had estimated earnings of 75 cents per share, on average, according to Thomson Reuters I/B/E/S. Excluding the Surface charge, Microsoft reported 66 cents per share profit, a less drastic miss.

Revenue rose 10 percent to $19.9 billion, helped by sales of Microsoft's Office suite of applications, but fell short of analysts' average estimate of $20.7 billion.

Sales of Windows rose slightly, but only because of the inclusion of some deferred revenue, weighed down by an estimated 11 percent dip in PC sales in the quarter.

Microsoft's Windows 8 has sold more than 100 million licenses since launching in October, but is struggling to win over many consumers confused by the new design which is more suited to tablets than traditional PCs. Acknowledging this, Microsoft is releasing a revamped version of the system called Windows 8.1 later this year, which brings back the iconic 'start' button.

(Additional reporting by Liana Baker in New York; Editing by Richard Chang)

Bits Blog: Microsoft Surface to Start at $500

David Mcnew/Reuters The Surface tablet, as displayed by Microsoft in June.

As the days tick down to Microsoft’s introduction of its Surface tablet, the company has revealed how it plans to price the product — more like Apple than Amazon.

Instead of adopting Amazon’s lower pricing on the Kindle Fire, Microsoft said it would sell Surface for a starting price of $500, the same starting price as the current generation of Apple’s iPad. People who buy that Surface model will get some extra perks though, including 32 gigabytes of storage — twice the amount of the cheapest third-generation iPad — and a 10.6-inch display, rather than the iPad’s 9.7-inch display.

Microsoft said it would sell a 32-gigabyte Surface bundled with a black Touch Cover, a keyboard that doubles as a protective shield for the tablet, for $600. A similar bundle with a 64-gigabyte Surface will cost $700. Microsoft will sell Touch Covers separately in a wider assortment of colors for $120, and a different type of keyboard cover with moving keys, called Type Cover, will sell for $130.

It’s clear Microsoft is aiming Surface at what is shaping up to be the premium portion of the tablet market, which Apple currently dominates. Amazon, in contrast, seems intent on using price as a weapon to gain market share against its rivals. The company recently introduced an 8.9-inch-screen Kindle Fire that starts at $300.

Microsoft has not yet said whether it will bring out a version of Surface that competes in the small-screen tablet category. Google’s Nexus 7 tablet starts at $200, while Amazon’s seven-inch Kindle Fire starts at $160. Apple is expected to announce a new, smaller iPad next week.

Surface will go on sale Oct. 26 in Microsoft retail stores in the United States and Canada. The company said the product would be sold online in Britain, China, France, Germany and several other countries. Microsoft said a limited quantity will be available for ordering on Tuesday at noon Eastern time.

The company also began showing a new Surface television commercial on Monday evening, featuring an odd collection of foot-stomping girls in school uniforms and dancers using their Surface tablets as percussion instruments.