It seems that the press wasn't the only entity unaware of how dismal Surface RT sales were until Microsoft's fourth quarter and full year results report back in July. The company revealed a $900 million "inventory adjustment" thanks to a stockpile of unsold Surface RT tablets, and now Microsoft investors are suing the company, claiming that they were "misled" because Microsoft failed to fully disclose sales figures of the Surface RT tablet during a specific window.
The class action lawsuit was filed by the Robbins Geller Rudman & Dowd law firm in the United States District Court for the District of Massachusetts. It was on behalf of purchasers of Microsoft common stock during the period between April 18, 2013 and July 18, 2013, aka the "Class Period". It claims that Microsoft violated the Securities Exchange Act by providing materially false and misleading statements regarding financial performance related to the ARM-based tablet.
According to the lawsuit, Microsoft misrepresented and failed to make public the fact that Surface RT was suffering poor demand and lackluster sales, that the overall inventory experienced a material decline in value during the quarter ending March 31, and that the financial statements for the same quarter were materially false and misleading. This non-disclosure of actual facts violated Generally Accepted Accounting Principles and Microsoft’s publicly disclosed policy of accounting for inventories.
The class-action lawsuit also alleges that Microsoft's Form 10-Q for its third quarter failed to disclose then presently known trends, events or uncertainties associated with the Surface RT that would likely have a material effect on Microsoft’s future operating results. Ultimately Microsoft is accused of having no basis for making positive statements about Surface RT during the defined Class Period knowing full well that Surface tablet sales overall were extremely poor.
The icing on the cake, according to the lawsuit, was the financial results for the fiscal 2013 fourth quarter and year end. The company reported revenue of $19.9 billion and net income of $4.97 billion, or $0.59 per share. These results were impacted by the $900 million inventory charge which amounted to $.07 per share. Thus common stock took the biggest hit in four years, dropping $4.04 per share, or 11.4 percent.
Adding to that, in late July, Microsoft admitted that the combined revenue of Surface RT and Surface Pro tablets was only $853 million since the tablet series launched in October 2012 (Surface Pro didn't appear until February 2013). That's less than the charge Microsoft took thanks to the stockpile of Surface RT tablets, thus the tablet division was nearly $50 million in the hole due to the Surface RT model.
Plaintiffs seek to recover damages on behalf of all purchasers of Microsoft common stock during the Class Period, the firm said. In addition to Microsoft on a whole, individual defendants named in the lawsuit include CEO Steve Ballmer, former CFO Peter Klein, VP of Finance Frank Brod and Executive VP of Marketing Tami Reller.
The actual lawsuit can be read in pdf format here. Microsoft shareholders wanting a piece of the Redmond pie are encouraged to contact the law firm via its website no later than October 11, 2013.
