 "Microsoft profit misses estimates amid Surface writedown")
Results also were hurt by a $900-million writedown of Surface tablet inventory, shaving seven cents a share from earnings. Excluding that, profit was 66 cents a share, Microsoft said on Thursday, trailing analysts' 75 cent prediction. The shares plunged as much as 10 per cent.
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 8.7 per cent to $32.35 at 10:02 am in New York. The stock had gained 33 per cent this year, compared with an 18 per cent increase in the Standard & Poor's 500 Index.
Surface sales
PC shipments fell 11 per cent 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.
Microsoft cut the price on one version, Surface RT, this week.
Intel Corp, 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 also are projected to underscore the shift to mobile devices.
Microsoft Chief Financial Officer Amy Hood said consumer PC shipments dropped 20 per cent 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 organisational 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 financial 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 per cent 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 from $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 centres, Hood said.
Unearned revenue, which comes from sales of multi-year deals that will be recognised 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 reorganising the world's largest software maker to try to spur better performance in areas like mobile computing. The biggest reorganisation 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. Thursday'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."