Microsoft Corporation (NASDAQ:MSFT)’s shares plummeted over 10% within a span of four days after it announced lower than expected results for the fourth quarter of fiscal 2013. The last few quarters have seen Microsoft battling the gradual decline in PC demand by churning out new products and entering the new and revolutionary world of tablet and mobile devices. Of late, Microsoft Corporation (NASDAQ:MSFT) has become an ardent follower of the “learning from mistakes” philosophy rather than “doing it right the first time.” May it be the reversal of policies with the new Xbox One or introducing the start button in Windows 8, Microsoft Corporation (NASDAQ:MSFT) has not been hugely successful the first time.
Lower than expected results because of falling PC demand
For the fourth quarter of fiscal 2013 revenue inched up by a mere 3% to $19.2 billion, whereas the earnings per share declined a massive 19%, to $0.59, from the year ago period. The main reason behind poor results was a decline in the overall performance of its Windows division owing to a sluggish PC demand. As a result of the constant decline in PC demand, hardware and software manufacturers have been facing a tough time. Hence, Microsoft Corporation (NASDAQ:MSFT) is putting in tremendous effort to enter the revolutionary tablet and mobile markets with its new OS, Windows 8, that is gaining traction.
Surface tablets are a big miss
One big miss for Microsoft Corporation (NASDAQ:MSFT) in the last year has been its Surface range of tablet devices that come in a couple of versions. The motive behind launching Surface was to promote the use of Windows 8 in the modern era of computing. However, Surface has failed to connect with customers as the company expected, compelling the company to reduce its price by $150 to $349. As the company reduced price of the Surface RT, it had to recognize a charge of $900 million to its income statement on account of inventory adjustment. This had a net effect of $0.07 on the EPS.
In my opinion, this massive reduction in price is also going to affect Microsoft Corporation (NASDAQ:MSFT)’s hardware partners like HP and Asus. When Microsoft entered the tablet market with Surface, it declared direct competition against its hardware partners who had started implementing the RT version of Windows operating system in its devices. Now, this price reduction will discourage the manufacturers from developing Windows RT powered tablets that will ultimately lead to lower usage of the OS. Thus, the overall adoption of Windows RT will suffer, compromising Microsoft’s essential motive of increasing its adoption.
As I had mentioned in one of my earlier articles, Windows 8 failed to get the attention of users because it lacked a stellar collection of killer apps. While Microsoft has been really working hard on apps, Google Inc (NASDAQ:GOOG)’s Android is running in a completely different league. While Android is an unparalleled platform for smartphone users, Microsoft’s Office 365 fares better compared to Google Inc (NASDAQ:GOOG) apps for business. The Office 365 is now at a $1.5 billion run rate as Microsoft has announced its expansion in over 125 markets worldwide.
Reportedly, Google Inc (NASDAQ:GOOG)’s Motorola division is all set to publicly launch its much anticipated phone, Moto X, in the next month. Hopefully, it will turn around Motorola’s fate, which has been generating losses since acquisition by Google Inc (NASDAQ:GOOG), hurting its overall profit margins.
American multinational corporations like Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) have now come on the radar of regulators across the globe for shifting revenue to countries that have a lenient tax regime. This will have a big impact on net earnings for these companies, who have quite cleverly lowered their tax burden by tying up revenue to tax havens.