Microsoft's fourth quarter unravels, Surface RT bet a flop

Microsoft's fourth-quarter earnings and sales missed expectations by a wide margin as the PC market slowdown and a write-down of Surface RT inventory painted a bleak picture.

The company reported fourth-quarter earnings of $4.97 billion, or 59 cents a share, on revenue of $19.9 billion. The results include a $900 million inventory write-down for Surface RT that amounts to 7 cents a share. 

Wall Street was expecting Microsoft to report fourth-quarter earnings of 75 cents a share on revenue of $20.73 billion. For the year, Microsoft reported earnings of $2.58 a share on revenue of $77.85 billion.  

There may be a few nuances in the numbers. Consensus estimates include the Office Upgrade Offer but not the Surface inventory adjustment. If you balance those two items out, Microsoft's fourth-quarter earnings would have been more like 66 cents a share. 

Meanwhile, Microsoft's Surface RT write-down is primarily attributed to price cuts earlier this week as well as increased distribution. 

But no matter how you slice it, Microsoft was walloped. Amy Hood, CFO of Microsoft, said the results were "impacted by the decline in the PC market" but that the enterprise business was strong.

The quarter for Microsoft reflects a tale of two companies -- an enterprise side that's killing it and a Windows part that's struggling to regain its footing as tablets cannibalize PCs.

For instance, Microsoft's Windows division reported operating income of $1.1 billion, down from $2.42 billion a year ago. Microsoft's online services division cut its operating loss to $372 million, a drastic improvement from last year's loss. In addition, Microsoft's entertainment and devices division also lost money -- dropping $110 million in the fourth quarter.

On the enterprise side, Microsoft has a much better story. The servers and tools unit had fourth-quarter operating income of $2.35 billion on revenue of $5.5 billion. The business division (think Office) had operating income of $4.87 billion on $7.2 billion.

Clearly, the enterprise side of Microsoft is carrying the team.

Among the key items in the fourth quarter:

• Microsoft noted that it was seeing increasing consumer demand for cloud services such as Office 365, Outlook.com, and Skype.
• Office 365 had an annual revenue run rate of $1.5 billion.
• SQL Server and System Center both had double-digit revenue growth.
• Microsoft lowered its expense guidance to $31.3 billion from $31.9 billion for the fiscal year ending June 30, 2014.
• For the year, Microsoft spent $10.41 billion on research and development, up from $9.81 billion for fiscal 2012.
• Total cash, cash equivalents, and short-term investments were $77.02 billion as of June 30.

This story originally appeared as "Microsoft's Q4 unravels, Surface RT bet flops" on ZDNet.