Microsoft Takes $900M Charge On Surface RT 'Inventory Adjustments'

On Thursday, Microsoft said it took a $900 million charge in its fiscal fourth quarter from what it described as "inventory adjustments" for the Surface RT tablet, which launched in October.

The unexpected charge, which lopped 7 cents per share off its fourth-quarter earnings per share, is the first hard evidence that Microsoft's tablet hardware gambit hasn't been working out.

[Related: Microsoft's Surface Strategy: A Tragedy Of Errors For Channel ]

Microsoft on Sunday chopped $150 from the price of its entry level 32-GB Surface RT tablet, which now sells for $349.

Despite the massive Surface RT charge, Microsoft is hopeful that the price cuts will spark sales.

"We believe this pricing adjustment will accelerate Surface RT adoption and position us for long-term success," Amy Hood, Microsoft's recently minted CFO, in Microsoft's fourth-quarter earnings call.

In March, Bloomberg reported that Microsoft had sold around 1 million Surface RT units and 400,000 of the Surface Pro, which debuted in February.

Until recently, Microsoft had been selling Surface tablets only through its own retail and online stores and through Best Buy, Staples and Wal-Mart. Last month, Microsoft granted the privilege of selling Surface to 10 large account resellers, but didn't offer any clues about when it'll extend that courtesy to its broader channel.

While Surface's hardware has been well received, Windows RT is generating a level of loathing and vitriol in Microsoft's customer base that hasn't been seen since the dog days of the Windows Vista launch.

This is especially true in the Microsoft channel, where partners are seething over what they perceive as a series of Surface snubs.

Designed to run on ARM chips, Windows RT can't run regular Windows apps, which is a big reason why it hasn't attracted much interest from OEMs. On Wednesday, Lenovo pulled the Yoga 11, a Windows RT laptop-tablet, from its online store.

Given the size of the Surface RT charge, it's possible that Microsoft has kept it out of the channel as a service to partners whose reputations could be damaged if they were to recommend the tablet to customers.

Another theory in the channel is that Microsoft is holding back on wider Surface distribution to avoid incurring the wrath of OEMs that are already cranky about the software giant's entry to tablet hardware.

Microsoft is now selling Surface RT and Surface Pro in 29 markets and 10,000 retail locations. Microsoft intends to let more resellers and distributors sell it "in the coming months," Hood said on the call.

Microsoft's fourth-quarter revenue rose 10 percent to $19.9 billion, and with the $900 million Surface RT charge factored in, the company earned 59 cents per share. Wall Street analysts were expecting 75 cents per share on $20.7 billion in revenue.

"We know we have to do better," said Hood, adding that last week's re-org was aimed at correcting the situation. "A transition of this magnitude takes time, but we are confident we are moving in the right direction."

Microsoft shares dropped nearly 7 percent to $33.09 in Thursday after hours trading.

PUBLISHED JULY 18, 2013