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Microsoft Tumbles as Profit Misses Estimates on Weaker PC Sales

Photographer: Bryan Mitchell/Bloomberg

The grand opening of a Microsoft Corp. store in Troy, Michigan on June 28, 2013. Microsoft, which has been struggling with the inability of outside retailers to effectively display its products, aims to generate more enthusiasm for them by opening its own stores. Close

The grand opening of a Microsoft Corp. store in Troy, Michigan on June 28, 2013.... Read More

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Photographer: Bryan Mitchell/Bloomberg

The grand opening of a Microsoft Corp. store in Troy, Michigan on June 28, 2013. Microsoft, which has been struggling with the inability of outside retailers to effectively display its products, aims to generate more enthusiasm for them by opening its own stores.

Microsoft Corp. (MSFT) fell the most in more than four years after fourth-quarter profit missed analysts’ projections by the biggest margin in at least a decade as demand weakens for personal computers running Windows.

Results also were hurt by a $900 million writedown of Surface tablet inventory, shaving 7 cents a share from earnings. Excluding that, profit was 66 cents a share, Microsoft said yesterday, trailing analysts’ 75 cent prediction. The shares plunged as much as 10 percent.

Stung by a Surface device that few consumers want, the company faces a shift by consumers to mobile gadgets that offer many of the same features as laptops and desktops at lower prices. Chief Executive Officer Steve Ballmer’s effort to focus the company on devices and services may reduce profit as both areas carry thinner margins than traditional software.

“PCs were just uglier than people thought they would be, and people also had more Surface sales in there than there were,” said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. in New York, who rates Microsoft shares outperform.

Microsoft fell 11 percent to $31.40 at the close in New York, the most since January 2009. The stock has gained 18 percent this year, compared with a 19 percent increase in the Standard & Poor’s 500 Index.

Surface Sales

PC shipments fell 11 percent last quarter, according to Framingham, Massachusetts-based IDC. Surface, Microsoft’s first-ever computer, shipped just 900,000 units in the December and March quarters, according to IDC. Microsoft cut the price on one version, Surface RT, this week.

Intel Corp. (INTC), the largest semiconductor maker, on July 17 forecast third-quarter sales that may fall short of some analysts’ estimates as the PC slump also erodes its largest business. Earning reports from Apple Inc. and Qualcomm Inc. (QCOM) also are projected to underscore the shift to mobile devices.

Microsoft Chief Financial Officer Amy Hood said consumer PC shipments dropped 20 percent in the quarter. That also hurt sales of Office software, she said.

“We know we have to do better, particularly on mobile devices, and so that’s a big reason we made the strategic and organizational changes we made last week,” she said in an interview. Asked how long it will take for Microsoft’s position in tablets to make up for the contracting consumer PC market, Hood said: “It will take a long time for that to happen.”

Net income for the fiscal fourth quarter was $4.97 billion. The company reported a net loss of $492 million a year earlier, which included a $6.2 billion writedown related to Microsoft’s 2007 acquisition of AQuantive Inc.

Sales rose 10 percent to $19.9 billion, while analysts had predicted $20.7 billion in revenue.

Operating Expenses

Microsoft reduced its forecast for operating expenses for the year that started July 1 to $31.3 billion to $31.9 billion. Capital expenditures, on the other hand, increased more than Microsoft had forecast last quarter. That area will continue to rise as the company focuses more on Internet-based services that are run out of Microsoft’s data centers, Hood said.

Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $22.4 billion, compared with the $21.8 billion average projection, according to analysts’ estimates compiled by Bloomberg. Revenue was boosted by the recognition of $782 million deferred from previous quarters related to coupons for Office upgrades.

Management Shuffle

Ballmer is reorganizing the world’s largest software maker to try to spur better performance in areas like mobile computing. The biggest reorganization of Microsoft in a decade, announced last week, is designed to speed development of hardware and services as the company’s Windows business continues to suffer.

The revamp may result in changes in how Microsoft reports earnings for its various units, Hood said in a conference call last week. Microsoft previously had eight business units and reported earnings broken into five groups. It now has four product-engineering units and hasn’t said how it will handle earnings for the new structure. Yesterday’s report is the first being handled by Hood, named in May to replace Peter Klein.

Microsoft has said it has sold more than 100 million copies of Windows 8. The company is currently testing a new version that adds features and addresses some customer complaints about the design. It’s also working with computer makers to get more machines in stores with touch screens and lower prices.

“The scale and complexity of the Windows ecosystem means this journey will take time but we are making incremental progress,” Hood said.

Windows Slips

Windows sales are being besieged by poor demand for PCs, reflected in five consecutive quarters of declining shipments, which researcher IDC predicts will be the worst annual drop on record. Sales in the Windows unit were $4.4 billion, below the $4.8 billion average estimate of analysts polled by Bloomberg.

“Consumer PCs remain pressured,” said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle, who rates the shares a hold. “Consumers are buying smartphones and tablets. Microsoft has launched some products in those areas but hasn’t made much headway. They’re late to market, and they’re not competitively priced.”

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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