Microsoft stumbles in Q4, takes $900M Surface RT charge

Microsoft closed its fiscal year with a less-than-stellar earnings report, missing Wall Street's revenue and profit expectations and taking a gigantic charge related to its Surface RT tablet sales.

Revenue came in at US$19.9 billion for the fourth fiscal quarter ended June 30, up 10 percent compared with $18.1 billion in the same quarter last year. Analysts polled by Thomson Financial had expected, on average, revenue of $20.7 billion.

Net income was $4.97 billion, or $0.59 per share, compared with a net loss of $492 million, or a loss per share of $0.06, in 2012's fourth quarter.

The results include a charge of $900 million, or $0.07 per share, related to Surface RT "inventory adjustments," a clear sign that the much-maligned tablet has had serious problems gaining traction among consumers and has been unable to compete well against the iPad.

The results also reflect the recognition of $782 million of previously deferred revenue related to the Office Upgrade Offer.

Adjusted for the Office Upgrade Offer item, pro-forma revenue would have been $19.1 billion and earnings per share $0.52, Microsoft said in a statement Thursday. Analysts had expected earnings of $0.75 per share.

That compares unfavorably with pro-forma revenue of $18.6 billion and earnings per share of $0.73 in 2012's fourth quarter, which excluded a huge charge for goodwill impairment of $6.2 billion related to Microsoft's Online Services Division.

CFO Amy Hood said in the statement that fourth-quarter results were affected by the PC market's continuing decline, but that the company is seeing continued strong demand for its enterprise and cloud computing products.

Other products that experienced strong demand during the quarter were Office 365, Outlook.com, Skype and Xbox Live, she said.

CEO Steve Ballmer said in the statement that the company is "working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs."

The Microsoft Business Division, which includes Office sales, had revenue growth of 14 percent year on year, or 2 percent when adjusted for the recognition of the Office Upgrade Offer deferred revenue. Office 365, the cloud suite of Office desktop and server products, is now on a $1.5 billion annual revenue run rate, the company said.

Revenue at Server & Tools grew 9 percent, helped by strong growth of SQL Server and System Center.
Windows Division revenue grew 6 percent, but excluding the impact of the Windows Upgrade Offer revenue deferral last year, quarterly revenue actually dropped 6 percent.

Microsoft plans to ship Windows 8.1, which is intended to address a number of issues for which Windows 8 has been loudly criticized, later this year.

The Online Services Division, which includes the Bing search engine, grew its revenue 9 percent.
The Entertainment and Devices Division had an 8 percent revenue increase, helped by Xbox Live sales growth of almost 20 percent.

Last week, Ballmer unveiled a broad reorganization that he described as a "far-reaching realignment" of the company, intended to transform Microsoft and lead it to innovate faster and operate in a more cohesive manner in order to better compete against rivals that include Apple, Google, IBM, Oracle and Cisco.
Ballmer's plan is designed to shift Microsoft's focus away from providing packaged software and toward supplying devices and services for personal and work use.

The reorganization also seeks to foster a more collaborative, collegial corporate culture at Microsoft, which has been criticized for internal conflict, and to create "one Microsoft."


"This is a big undertaking. It touches nearly every piece of what we do and how we work. It changes our org structure, the way we collaborate, how we allocate resources, how we best empower our engineers and how we market," Ballmer said in a statement last week.

Porn, wine and kazoos on IRS worker charge cards

The IRS is in the spotlight again, this time for employees using IRS charge cards improperly.

Like a lot of big companies, the Internal Revenue Service allows some of its 90,000 employees to use company charge cards to buy work-related items, such as office supplies.

However, employees made a host of "improper" purchases -- ranging from a dinner averaging $140 per person to Thomas the Tank Engine rubber wristbands -- according to the Treasury Inspector General for tax administration. The report was released as part of a regular audit of IRS budget expenses.

The report comes at a particularly bad time for the IRS, whose employees have recently been in the spotlight for singling out political groups, including Tea Party conservatives, for extra tax scrutiny over the years.

Related: IRS targeting included liberal groups

The inspector general said the IRS has been negligent when it comes to catching employees who circumvent $3,000 caps on transactions, by splitting purchases into several transactions. The agency also doesn't have a good record at turning off credit cards as soon as employees depart or retire.

"The IRS purchase card program lacks consistent oversight to identify and address inappropriate use," the report found.

The IRS spent $50,000 on a week's worth of meals, parties and meetings for a five-day International Executive Conference, the report said. During that week, IRS paid for a dinner, which averaged $140 a person.

 

The IRS also hosted a lunch that averaged $100 a person and included 28 bottles of wine for 41 guests. The IRS defended the purchases by saying that alcohol purchases are allowed by law when entertaining foreign officials, as happened at the conference. But the watchdog said the expenses were too high.

The report also said that employees had spent some $4,000 on buying kazoos, Thomas the Tank Engine rubber wristbands and Nerf footballs.

IRS disagreed with the findings, saying that federal law allowed those purchases, since they were meant for training, decoration, fundraising or team-building exercises.

Related: IRS to pay $70 million in bonuses

The watchdog also found two instances where IRS charge cards had been used to buy online pornography. In both cases, the cardholders reported their cards were stolen or compromised. But the report said the employees in question had also reported other charge cards stolen or compromised, leading auditors to question whether employees lied about losing cards with porn charges.

IRS chief Danny Werfel promised to get to the bottom of the findings.

"Clearly, any inappropriate card use impacts our bottom line and is cause for concern," Werfel said in a statement. "Wasteful spending cannot be tolerated, and any employees found to be abusing the system will be held accountable."

It wasn't all bad news. The watchdog said that despite these findings, most IRS employees "appear to use their purchase cards properly."

Twitter: @sajilpl

Oracle to charge extra for 12c database's 'fundamental' feature

For the better part of a year, Oracle has touted the “pluggable database” feature in its upcoming 12c database release as a significant architectural shift that will usher in major performance and efficiency improvements and also make cloud-based applications more secure.

But customers who want to take advantage of the pluggable database concept when 12c is released won’t get it in return for their regular maintenance fees. Instead, Oracle plans to offer it as a “separately priced option,” CEO Larry Ellison revealed Thursday on the company’s fourth-quarter and year-end earnings call.

The feature allows multiple databases to run inside of a single 12c database instance and constitutes Oracle’s take on multitenancy, which is a key ingredient of cloud-based applications.

In the past, multitenancy has referred to a practice followed by SaaS (software as a service) vendors such as Salesforce.com, where many customers share the same application instance, but with their data kept separate. Oracle believes that application-level multitenancy is inferior and less secure than 12c’s approach, which pushes multitenancy to the database tier, Ellison said on the conference call.

Pluggable databases in fact represent “a fundamental re-architecture of the [Oracle] database,” Oracle senior vice president Andy Mendelsohn said at last year’s OpenWorld conference when 12c was introduced. “Now if I’m an administrator, I have one database overall to administer.”

But in order to get that experience, customers who upgrade to 12c will need to fork over extra money above and beyond the core license fee for Oracle Database Enterprise Edition, which as of Friday remained listed at $47,500 per processor, as it has been for some time.

Mendelsohn’s characterization of pluggable databases as a “fundamental” change to the platform notwithstanding, Ellison’s announcement is not altogether surprising.

Many other previously released features for Enterprise Edition also carry additional fees, such as Real Application Clusters, which cost $23,000 per processor.

While Oracle tends to give customers heavy discounts off list price for software licenses, by breaking out pluggable databases and other options from the main product, it generates additional streams of lucrative annual maintenance revenue.

Therefore, Oracle database customers who have been anticipating 12c and paying for maintenance on the core product will likely be disappointed to discover that they won’t receive pluggable databases as part of a regular upgrade.

That said, it’s possible the cost of using the pluggable database option can be significantly offset by benefits such as easier system maintenance and lower demand for computing resources.

Still, one database industry watcher offered a less-than-glowing assessment of Ellison’s announcement.

“Oracle’s business model depends upon extracting maximum revenue from those enterprises that have chosen to be captive to it,” said analyst Curt Monash of Monash Research.

Oracle has yet to announce an actual launch date for 12c, but it is expected to occur soon.

Meanwhile, Oracle is set next week to announce a number of partnerships with software vendors around 12c that will “reshape the cloud and reshape the perception of Oracle technology in the cloud,” Ellison said.

While Ellison promised the announcements would be “startling,” and are to involve companies such as NetSuite, Salesforce.com and Microsoft, only the last seems especially intriguing.

That’s because both NetSuite and Salesforce.com are longtime users of Oracle’s database technology, although Salesforce.com has made a few moves away from the platform.

But Microsoft has its own widely used SQL Server database, which competes with Oracle’s product and is available on Microsoft’s Azure cloud platform. And Oracle has its own Azure-like service, through which it also offers its database.

Still, Microsoft and Oracle’s joint press conference Monday is apparently important enough to merit the attendance of Microsoft CEO Steve Ballmer and Oracle president Mark Hurd, although Ellison wasn’t expected to appear.

The rumor mill has churned up quite a bit of speculation over the event, with one of the more prominent themes being that Oracle and Microsoft will announce additional support for running Java applications on Windows Azure, said analyst Ray Wang, CEO of Constellation Research.

Another scenario being floated would see Microsoft and Oracle team up on an OpenStack-like hybrid cloud project, Wang said.