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Microsoft 4Q profit misses; books Surface charge

Ryan Nakashima, AP Business Writer

In this Thursday, June 20, 2013, photo, people crowd the aisles during the grand opening of a Microsoft retail store in downtown Portland, Ore. Microsoft Corp. reports quarterly financial results after the market closes on July, 18, 2013. (AP Photo/Don Ryan)

LOS ANGELES (AP) -- Microsoft Corp.'s foray into the tablet computer market resulted in a large write-down for the April-June quarter, and a poor reception for Windows 8 contributed to a drop in operating system software revenue.

The missteps in both strategic product lines, reported in quarterly results Thursday, disappointed Wall Street and shares plunged 6 percent to $33.30 in after-hours trading.

The write-down on the Surface RT tablet amounted to $900 million. Even without it, Microsoft's results would have fallen short of expectations.

The results came a week after the company announced a major reorganization to help transform into a "devices and services" company that is less reliant on providing software for personal computers. The earnings miss raised new questions as to whether the transition will succeed.

"It doesn't inspire a lot of confidence," said Nomura Securities analyst Rick Sherlund. "You're in the hardware business now, and pretty shortly after entering it you have a pretty big write down. That's embarrassing."

Both Windows 8 and the Surface tablet represent Microsoft's big bets on the tablet computer market as PC sales continue to decline. Acknowledging the company's difficulties with the change, Microsoft Chief Financial Officer Amy Hood told investors on a conference call that "this journey will take time."

"We know we have to do better," she said. "We are confident we are moving in the right direction."

Microsoft cut the price of Surface RT from $499 to $349 on Sunday, a move designed to spur sales amid sluggish demand.

Microsoft began selling Surface tablets in October. The company shipped about a million tablets in the first three months of 2013, according to research firm IDC. That includes about 260,000 of the slimmed-down RT version and 750,000 of the Pro version of Surface, which is compatible with older Windows programs.

Research firm IDC says Microsoft shipped about a million tablets in the first quarter of 2013, for a meager 2 percent share of the market. Apple Inc. remained the leader with 39.1 percent and was followed by Samsung Electronics Co., AsusTek Computer Inc., Amazon.com Inc. and Acer Inc.

Microsoft also saw revenue from its flagship Windows operating system decline 6 percent in the recent quarter after excluding the late recognition of revenue from last year, when it offered discounted upgrades to users of older versions of Windows.

Consumers haven't responded well to Microsoft's latest operating system, Windows 8, and the results reflect the poor reception. Analysts believe the new operating system is contributing to the longest slump in personal computer sales.

Revenue and profitability improved in Microsoft's other lines of business, including enterprise software, servers and tools, the Xbox video game division and the Bing search unit, but those results also fell short of analysts' forecasts.

Net income in the April-June quarter came to $4.97 billion, or 59 cents per share, reversing a loss of $492 million a year ago when it wrote down almost the entire value of its 2007 purchase of online ad service aQuantive.

Excluding the Surface charge, earnings were 66 cents per share, short of the 75 cents per share expected by analysts polled by FactSet.

Revenue grew 10 percent to $19.90 billion, also below the $20.72 million expected.