Computer: Surface RT tanked, but expect Microsoft's numbers to come out rosy

Surface RT tanked, but expect Microsoft's numbers to come out rosy | Microsoft windows - InfoWorld Infoworld Channels

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July 19, 2013 Surface RT tanked, but expect Microsoft's numbers to come out rosy Reorgs rarely improve organizations -- but watch and see how they can work wonders on balance sheets By Woody Leonhard | InfoWorld Follow @woodyleonhard Print| window.fbAsyncInit = function() { FB.init({ appId : '154252124591160', channelUrl : '//www.infoworld.com/modules/DCP/custom/dcp_base/channel.html', // Channel File status : true, // check login status cookie : true, // enable cookies to allow the server to access the session xfbml : true // parse XFBML }); FB.Event.subscribe('edge.create', function(response) { OPG.Eloqua.refresh_iframe("social"); }); }; (function(d, s, id) { var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) return; js = d.createElement(s); js.id = id; js.src = "//connect.facebook.net/en_US/all.js#xfbml=1"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk')); Surface RT tanked, but expect Microsoft's numbers to come out rosy

Face it: To Microsoft, the $900 million Surface RT write-off is chump change. Yesterday's earnings report didn't include any heart-stopping revelations to folks who've been following the saga. But it begs the question of what Microsoft will do next, as PC sales inexorably fall into the abyss -- first for consumers, then for companies.

Just a little bit of math seems to indicate that Microsoft has somewhere around 6 million (based on $900 million write-off/$150 discount per machine) Surface RT tablets sitting around gathering dust, although Microsoft may have written off the entire $280 build cost, which means there are "only" 3 million or so rotting away. Nobody knows how many Surface RTs Microsoft ordered, but it wouldn't surprise me a bit if the sales performance matched Windows for Warehouse's rumored 2/3 rot rate.

My take? Steve Ballmer has known for a long time that the bad numbers were coming and built a certain resiliency into his reorganization to help the Microsoft cat land on its feet. The resiliency I'm talking about has nothing to do with management reporting chains (or the "dotted line" lack thereof), functional coherence, devices, services, or the drive to break down ancient fiefdoms. It has everything to do with accounting.

David Hall at the Wall Street Journal summed it up yesterday, before the earnings revelations:

The organizational changes strip away a structure based around divisions overseeing particular products and impose a horizontal scheme with managers that oversee different kinds of functions -- such as engineering, marketing, and finance -- that would be applied to multiple product lines ... CFO Amy Hood noted that accounting rules require companies to disclose revenue and earnings that illustrate how executives manage the business: "As we go through this reorganization and realignment, we will investigate changes over time to reporting structures as well."

Seen through that lens, Microsoft's immediate future -- from an accounting point of view -- looks rosy indeed, if Hood can get the reporting categories changed:

With Office now falling under Qi Lu's Applications and Services group, the huge losses on Bing and other online (mis)adventures can be offset by income from Office and Office 365, which moo like supercows. Microsoft lost $372 million in the Online division last quarter, with a cumulative loss since the Bing disaster started of about $12 billion -- $18 billion, if you include last year's $6 billion write-down of aQuantive. (See what I mean by chump change?) In the future, Lu's mission encompasses Office and Office 365, and if Office 365 continues at its current, laudable $1.5 billion annual revenue run rate and with combined Office revenue of $7.2 billion last quarter, all that nasty old Online Division red ink gets offset by a healthy Applications and Services positive cash flow. And you thought there was no good reason, organizationally, to lump Office in with Bing.Microsoft never has separated Windows Phone revenue from Android patent revenue. Microsoft reported that, altogether last quarter, Windows Phone and Android showed an increase in profit of $222 million over the previous year. Nobody has any idea how much came from which pocket; it's possible that the entire increase came from Android. Historically, Microsoft has separated Windows Server and Tools (latest quarter: $2.3 billion profit) from Windows itself ($1.1 billion). With all of the Windows ducks now lumped together in Terry Myerson's Operating Systems group, I'll give you one guess as to whether we'll see more or less information about Windows Phone financials in the future.What do you want to bet that we learn less about Surface in the future, as well? (Assuming it's even possible to learn less -- sorry for my snark.) With Julie Larson-Green now heading the Devices and Studios group, she's in charge of Surface (last quarter sales: who knows?) as well as Xbox. Last quarter, Windows Phone/Android patent income was reported in the Entertainment and Devices Division (last quarter sales: $1.9 billion), which includes Xbox. In the future, Surface sales will probably be commingled with the Xbox, which is kind of like commingling the Queen Elizabeth II with a dinghy.

Expect Microsoft Accounting 3.0 to obfuscate even more than the current 2.0 version. It remains to be seen if financial analysts will take the smoke lying down.

Microsoft's numbers are sure to get better, but what about the reality? Todd Bishop at GeekWire reports that the Surface RT insanity will persist, at least officially, temporarily:

Asked about the Surface RT price cuts, Microsoft's director of investor relations Lisa Nelson said via phone that "we believe that it will accelerate Surface adoption and better position us for long-term success."

Many analysts suggest that Microsoft will soon update its Windows 8 sales numbers. If so, I expect to see a healthy increase in the number of Windows 8 licenses sold -- using the same counting techniques that have shown us a Windows 8 adoption rate exceeding Windows 7's meteoric rise (cough, cough). Maybe we'll see very impressive Surface sales numbers, too.

As I write this, after-hours trading in Microsoft stock has seen the valuation of the company go down 6.3 percent, or almost $19 billion in market cap.

With Windows 8.1 already released to manufacturing -- that's the rumor, anyway -- and shipments due to PC manufacturers on Aug. 16, Microsoft's looking at a relatively clean, uh, slate. With accounting changes almost certainly on the way, your three-card monte skills will be put to the test.

This story, "Surface RT tanked, but expect Microsoft's numbers to come out rosy," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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Computer

Wednesday, 7 August 2013

Surface RT tanked, but expect Microsoft's numbers to come out rosy

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