Microsoft shares plunge after poor results

NEW YORK: Microsoft Corp. shares fell more than 11 percent, their biggest plunge in four years, a day after the software company posted dismal quarterly results due to weak demand for its Windows system and poor sales of its Surface tablet.
The sell off after the stock was riding at five-year highs is the biggest in percentage terms since January 2009, when the world’s largest software company unexpectedly cut 5,000 jobs.
Microsoft’s earnings were wrecked by a $900 million write down on the value of unsold Surface tablets after it cut prices in a bid to excite buyers.
The poor results shocked Wall Street, which had believed the company’s strength with business customers would help it ride out a downturn in consumer PC sales. The results provoked fresh skepticism of Chief Executive Steve Ballmer’s new plan to reshape the company around devices and services, unveiled last week.
“The recent reorganization does not fix the tablet or smartphone problem,” said Nomura analyst Rick Sherlund in a note to clients.
“The devices opportunity just received a $900 million hardware write-off for Surface RT and investors may not even like the idea of wading deeper into this territory.”
Sherlund suggested that activist investors will pressure Ballmer to reconsider his strategy this summer, a reference to ValueAct Capital, which took a $2 billion stake in Microsoft in April and is widely expected to push for a board seat this summer.
“This (the results) was much more disruptive than investors have expected, with Microsoft missing its guidance in every division and guiding lower,” wrote Sherlund. “Everything an activist investor could ask for.”
Other Wall Street analysts were similarly dismayed by Microsoft’s latest financial report.
Brokerages Raymond James and Cowen & Co. cut their ratings on Microsoft stock by a notch to “market perform” and at least five others trimmed their price targets by as much as $3.
Price targets were cut as low as $35, below Thursday’s closing price of $35.44. The shares fell to $31.55 on the Nasdaq.
FBR Capital Markets analyst David Hilal said Microsoft’s revenue from Windows operating system in the fourth quarter was 9 percent below his expectations.
“The key potential growth drivers (Windows 8, Surface) of the Microsoft story appear to be fading, heading into FY14,” Hilal wrote in a note.
Earlier this week, Microsoft said it was drastically cutting Surface prices to entice buyers, reducing the value of the devices in its inventory.
Microsoft launched Surface tablets last year to challenge Apple Inc’s, but their sales have failed to meet expectations.
“Unfortunately, the new Windows RT operating system has not been the hit MSFT had hoped for,” Cowen analyst Gregg Moskowitz said in a note, adding that investor expectations for the tablet were never very high.
Janney Capital Markets analysts said the write down was an admission that Microsoft’s first attempt in the tablet market had not been successful.
The company also said earlier it expected revenue from Windows software to continue to fall due to a weak PC market.
Microsoft’s outlook points to a weaker PC market, shifts toward subscription revenue and a pause ahead of the Xbox One gaming console release, all of which are expected to put revenue growth under pressure, Morgan Stanley analysts said in a note.
Xbox is the only device by Microsoft that has found a following among consumers and a new version is expected to launch this year.