Microsoft Hit With Surface Tablet Lawsuit

Pedro Hernandez covers Microsoft products and services, such as Office, Windows, Windows Phone, Azure and Skype.

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Microsoft investors sue Redmond for “misleading statements” as Surface RT recriminations begin

Microsoft has been hit with a class-action lawsuit from disgruntled investors, upset by the negative impact of Redmond’s tablet forays.

Indeed the investors allege that Microsoft issued “materially false and misleading financial statements” at the close of its fiscal 2013 third quarter in violation of generally accepted accounting principles and Securities and Exchange Commission rules.

Surface Tensions

At the centre of the allegation is Microsoft’s slow-selling Surface RT tablet.

Rhapsody on Surface RT“These false and misleading statements materially misrepresented the true financial effect that Surface RT was then having on the Company’s operations,” asserts the lawsuit, filed on behalf of shareholder Gail Fialkov and others who bought shares in the company between 18 April and 18 July (the “Class Period”).

Those statements, according to the plaintiffs, “caused Microsoft common stock to trade at artificially inflated levels.” The stock reached $36.43 (£23.48) on 16 July, 2013, two days before the company announced its fourth-quarter earnings. The subsequent drop in value caused “real economic loss to investors who had purchased Microsoft common stock during the Class Period,” states the suit. As of this writing, Microsoft stock trades at $31.90 (£20.56).

Microsoft has not responded to a request from eWEEK for comment.

The company reported diluted earnings of $0.59 (£0.38) per share for its fiscal 2013 fourth quarter on 18 July, missing analyst estimates of $0.75 (£0.48) a share due, in part, to a $900 million (£580m) charge related to Surface RT.

“We reduced the price of Surface RT by $150 (£97) to $349 (£225) per device. As a result of this price change, as well as inventory adjustments for related parts and accessories, we recorded a $900 million charge to our income statement,” explained Microsoft Chief Financial Officer Amy Hood during the earnings call.

Powered by an ARM-based processor, Surface RT failed to gain traction in the competitive tablet market, which is currently dominated by Apple’s iPad. Arriving at a time when small tablets were making big inroads in the market and lacking in support for traditional x86 Windows software, both consumers and enterprises largely avoided the slate.

Misleading Statements?

The legal action hinges largely on “false and misleading statements” made by Microsoft executives that allegedly masked poor customer demand and a material decline in the value of the company’s Surface RT inventory during its fiscal third quarter, among other charges. These statements include optimistic comments made by Microsoft CEO Steve Ballmer as the company announced its fiscal 2013 third quarter earnings on 18 April, the start of the Class Period.

“The bold bets we made on cloud services are paying off as people increasingly choose Microsoft services, including Office 365, Windows Azure, Xbox LIVE and Skype. While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long term,” stated Ballmer in a press release.

Statements made during a conference call by Chris Suh, general manager of investor relations for Microsoft, were also called into question. “Non-OEM revenue grew 40 percent this quarter, driven by sales of Surface and continued double-digit growth in volume licensing,” he is quoted as saying.

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Originally published on eWeek.