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Microsoft earns $4.97 billion in Q4, but Surface RT hurts profits

Microsoft earns $4.97 billion in Q4, but Surface RT hurts profits

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Microsoft's Q4 2013 earnings report is in, and the company is announcing revenue of $19.90 billion — a 10 percent increase from the same quarter last year. Microsoft posted $4.97 billion net income this time around with earnings per share at 59 cents. There's a significant increase in net income from last year, but the software maker was weighed down last year by a "goodwill impairment charge" of $6.2 billion related to the write-off of its 2007 acquisition of aQuantive. However, Microsoft is taking a $900 million hit on Surface RT "inventory adjustments," which have been off to a slow start. Microsoft recently lowered the cost of all its Surface RT devices by $150.

PC sales are continually declining, and Microsoft's Windows division posted revenue of $4.4 billion, a six percent increase from the same period last year. That revenue was boosted by the revenue from a Windows Upgrade offer, but similarly was negatively impacted by the Surface inventory adjustment. Whereas this time last year Microsoft was awaiting the completion of its Windows 8 OS, the software is readily available now on tablets, PCs, and notebooks. Microsoft doesn't appear to be providing an update on Windows 8 license sales though. The company revealed it reached 100 million licenses in early May, a figure that's almost identical to Windows 7's early performance. Around this time three years ago, Microsoft revealed 175 million license sales for Windows 7, on the same day it reported its Q4 2010 earnings. While Windows 8 tablet sales are still largely a mystery, we expect Microsoft to confirm its Windows 8 license numbers in the coming weeks. The last announcement in May lagged behind the previous earnings release too.

On the Xbox side, Microsoft's Entertainment and Devices Division recorded $1.9 billion in revenue, a 7.5 percent increase from the same period last year. Microsoft's Business Division, which includes Office, posted an increase of 14 percent, accounting for 7.2 billion in revenue alone. For the fiscal year in total, Microsoft recorded $77.85 billion in revenue, with operating income at $26.74 billion.

Microsoft's Q4 2013 will likely be the last time we see the company report its earnings using this structure. CEO Steve Ballmer recently revealed a huge internal reorganization that sees Windows, Windows Phone, and Xbox bundled into the same software division. The hardware, like Xbox and Surface, will be merged into Microsoft's own hardware division that will be led by former Windows chief Julie Larson-Green.

It's unclear exactly how Microsoft will report its finances in future earnings. Microsoft's new CFO Amy Hood, who took over from Peter Klein earlier this year, recently said that Microsoft is investigating changes to its financial reporting over time. "Obviously, the requirement over a period of time is to report your system in the way that the CEO manages it," she noted. The structural changes mean that Microsoft's online service Bing is aligned in the same division as Office, a suite of apps that generates a lot of revenue for the software maker. It will be interesting to see just how Microsoft plans to report its finances in the coming months.