Microsoft’s dismal sales performance of its Surface RT tablet has made a big hit to its bottom line. The company reported Thursday a $900 million charge against earnings, which amounts to 7 cents per share of Microsoft stock, because of weaker than expected sales of the first-ever Microsoft-manufactured tablet.
Aside from the trouble with Surface, Microsoft reported earnings of 66 cents a share, below analysts’ forecasts of 75 cents a share, on revenue of $19.9 billion dollars, short of the analysts’ forecast of $20.7 billion. These results are for the three-month period ended June 30, which is the end of Microsoft’s fiscal year 2013. When the actual performance of a company falls short of what analysts forecast it to be, that’s bad news for the company’s stock.
It was in this case as Microsoft stock fell by $2.42 a share, to $33.02, three hours after the market closed, a nearly 7 percent drop from before the earnings were announced.
As I reported earlier this week, Microsoft has cut the starting price of the Surface RT tablet to $349, from $499 when it was introduced in October of 2012. Surface was introduced as a game changer – the first computer manufactured by Microsoft – and as an alternative to tablets running Google’s Android OS and the iconic Apple iPad. The Surface also runs the new Windows 8 operating system, which is a significant change from the user interface people were used to with earlier Windows OSes.
As a result of these and other factors, Surface has had difficulty making a dent. Microsoft later introduced the Surface Pro with more memory than the RT and support for Windows 7 versions of enterprise apps, starting at $999.
In a conference call with investment analysts this afternoon, Amy Hood (pictured), in her first earnings call as the new chief financial officer (CFO) for Microsoft, said the company hopes the price cut, along with wider distribution through more retailers and through business and institutional sales channels, will improve sales.
“We believe this pricing adjustment will accelerate Surface RT adoption and position us better for long-term success,” Hood said.
The strategy does get an endorsement from Rob Enderle, principal analyst at The Enderle Group in San Jose.
$150 is a significant price drop and “people like a value so certainly it should do better than it did at the prior price,” Enderle told me in a phone interview.
And anything Microsoft can do to increase the distribution of Surface RT will help, he added. Originally, Surface was only available at a relative handful of Microsoft owned stores nationwide – including the Valley Fair Mall in Santa Clara – and on Microsoft’s Web site. It has since expanded to big box retailers such as Fry’s and Best Buy and at, according to Hood, a total 10,000 retailers.
There might be another opportunity for price cuts once Microsoft transitions from using the Intel Atom processors in their devices to the next generation Intel Haswell processors.
Microsoft also hopes for a positive result from a corporate reorganization announced last week by CEO Steve Ballmer, called “One Microsoft.”
Hood acknowledged on the call that “we know we have to do better.”
“With 1.5 billion Windows users around the world, a transition of this magnitude takes time,” she said. “We are confident we are moving in the right direction.”
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