Parsing The $900M Surface RT Writedown
Today Microsoft dropped a $900 million bomb onto the tech world in the form of a writedown stemming from “inventory adjustments” regarding the Surface RT tablet hybrid.
That cost the firm $0.07 per share, and given that investors didn’t quite know that it was coming, it helped Microsoft miss expectations, and firmly decline 6% in after-hours trading. That’s what, around $18 billion in evaporated market capitalization? Not all Surface RT related, of course, but that $900 million was no small part of the generally weak report.
Office 365 is doing great, as an aside. It’s on a $1.5 billion run rate now, up 50% in just a few months.
But the Surface RT charge is almost comically large. How was it calculated? From what did it stem? Twitter acquaintance of my Jay Yarow has some news via Microsoft:
The charge reflects the new market value of the Surface RTs that are in Microsoft’s inventory, the company’s IR boss, Chris Suh explained to us over the phone.
He said Microsoft believes this new price point will help it start selling Surface RTs. He says Microsoft remains “100% committed” to the Surface business.
Right. The 100% committed part is actually true, if you were wondering. But the math here is crazy. If the $900 million charge “reflects the new market value of the Surface RTs that are in Microsoft’s inventory.” Following their $150 per unit price cut at the lower storage SKU, for example, Microsoft has 6 million Surface RT units that it just had to cut the value of.
Holy hell. That can’t be right.
According to my IRL BFF and Arch Rival Mary Jo Foley, the writedown is a bit broader than what Microsoft indicated above: “The write-off also includes parts and accessories, according to Hood on the call.”
Ok, but that doesn’t come close to sorting out the cost differential that appears to be this side of ludicrous.
A few ideas: Microsoft simply misread the market so massively that it has millions of unsold Surface RT tablets in boxes, thus making the ~$150 writedown fit into the $900 million figure.
Or Microsoft is simply not valuing its remaining Surface RT hardware at the $350 per unit current cost of the basement SKU. Assuming a $300 writedown per unit, we could expect around 3 million units in boxes, sans calculations for other dongles and accouterments.
I doubt they are making such a broad reduction in stated value for their hardware.
Steven Sinofsky, former Surface and Windows boss, told myself and other gathered reporters that the Surface line was “a real business.” The implication was that Microsoft was not selling them at a loss, at first.
That appears to no longer be the case.
I’ve been calling channel clearing on the Surface RT line for some time now, generally to be at least partially rebuffed by Microsoft. I am feeling somewhat vindicated.
But really, they have to get those devices out so they can release their coming - it had better be coming - hardware refresh.