Surface RT Delivers 1 $900M Sting to Microsoft

The software giant's venture into ARM-based tablets takes a bite out of the company's earnings and casts its future into doubt.

Surface RT, Microsoft's ARM-based Windows tablet, darkened the company's latest earnings, overshadowing some generally positive results from most of the company's other business units.

Microsoft reported on July 18 that the company had hauled in $19.9 billion during its fourth quarter, which ended June 30—a 10 percent gain over the same quarter a year ago. For fiscal year 2013, revenue hit $77.8 billion, a 6 percent gain over the previous year.

Despite a PC sales slowdown, the results speak to the strength of Microsoft's business software units and growing cloud services slate, said Microsoft Chief Financial Officer Amy Hood. "While our fourth quarter results were impacted by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter. We also saw increasing consumer demand for services like Office 365,, Skype, and Xbox LIVE," she said in a statement.

Nonetheless, Microsoft missed estimates. Analysts were expecting revenue of $20.72 billion and 75 cents per share, versus the 59 cents per share Microsoft reported.

The cause, in part, was a $900 million write-off of the Surface RT tablet.

"We reduced the price of Surface RT by $150 to $349 per device. As a result of this price change, as well as inventory adjustments for related parts and accessories, we recorded a $900 million charge to our income statement," said Hood during a July 18 earnings call.

In a bid to spur sales, Microsoft slashed Surface RT's price by $150 this month, lowering the cost of the basic 32GB model to $349 from $499. A Microsoft spokesman told The Wall Street Journal, "We've been seeing great success with pricing and cover promotions over the past several months on Surface RT in the U.S. and other markets."

Despite the tablet giving Microsoft a black eye, Hood sounded similarly upbeat about Surface RT's future. "While this resulted in a -$0.07 impact on earnings, we believe this pricing adjustment will accelerate Surface RT adoption and position us better for long-term success."

Microsoft CEO Steve Ballmer signaled that with a big Windows 8.1 update in the wings, the software maker isn't ready to call it quits. "We are working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs," said the executive in a statement.

Although the price drop makes it among the least expensive tablets in its class, Surface RT still faces an uphill battle. Several factors limit the device's appeal, including corporate apathy, limited network connectivity and, crucially, its inability to run the vast majority of the x86-based Windows software ecosystem.

Some of those shortcomings are remedied by the Surface Pro, which runs the full version of Windows 8 on an Intel processor and therefore slips seamlessly into corporate IT asset and user management environments. While the Surface Pro is a hit with reviewers, the tablet is thicker, weighs more, drains batteries faster and carries a price tag ($899 to start) that treads close to premium laptop territory.

Pedro Hernandez

Pedro Hernandez

Pedro Hernandez is a contributor to eWEEK and the IT Business Edge Network, the network for technology professionals. Previously, he served as a managing editor for the network of...