Microsoft Turns In a Big Loss

Jul 22, 2015

Microsoft Corp.turned in an upside-down financial report for its fiscal fourth quarter, showing weakness in its usually robust corporate-software division but strength in some consumer-technology areas that are traditionally middling.

It also reported a $3.2 billion quarterly loss, a departure for a company that typically generates reliable profit. The loss resulted from $8.4 billion in previously announced charges and layoffs in the company’s struggling mobile-phone operation, which Microsoft acquired last year from Nokia Corp.

“I am proud of the results we delivered,” Microsoft Chief Executive Satya Nadella said on a conference call with analysts.

Indeed, beyond the mobile carnage, results for the three months ended June 30 were better than analysts had expected—but sales growth came from less-profitable areas that Wall Street cares little about.

The company’s shares were down 3.9% to $45.45 in after-hours trading on Tuesday. In 4 p.m. trading, Microsoft’s shares were up 36 cents to $47.28.

Revenue was strong from some products targeted largely at the consumer market. Sales of the Surface tablet, for instance, more than doubled from a year earlier to $888 million, and sales of Xbox game consoles and associated videogame revenue rose 27%. But that wasn’t enough to generate increases in consumer divisions in total, as revenue fell 13%. Windows revenue took a hit as fewer people bought new personal computers and sales sagged in the unprofitable mobile-phone business.

Investors tend to overlook Microsoft’s consumer divisions, where profit margins are lower than in its business products and services. But Microsoft needs its consumer-focused areas to do well as it prepares for next week’s launch of Windows 10, the latest version of its operating system for PCs, tablets and smartphones.

For the first time in the company’s history, Microsoft is letting many people with existing computers upgrade to the latest Windows free of charge. To make up the lost revenue, the company is counting on selling those customers add-ons like PC videogames, Office and Web-search ads. This will be a test for Microsoft, which historically hasn’t been successful selling add-on services to consumer PC users.

Most of Microsoft’s profit comes from sales of Windows, Office, databases and other corporate software. Total sales of those and other products sold to businesses rose 0.2% to $13.53 billion in the fourth quarter—the slowest growth pace in at least two years. The revenue growth was undermined in part by a strong U.S. dollar and tough comparisons to a Windows sales surge last year.

Revenue growth cooled a bit in Microsoft’s closely watched “cloud” software business, including Web-friendly versions of Office for businesses and the Azure computing infrastructure service. Cloud software sales rose 88% from a year ago, but those big gains represent a slowdown from prior quarters’ greater-than-100% growth rates.

“Cloud was strong in the quarter, although some of the bulls were hoping for a bigger number, and that could be weighing on shares,” FBR Capital Markets analyst Daniel Ives said in an email Tuesday.

Overall in the quarter, Microsoft’s loss came to $3.2 billion, or 40 cents a share, compared with a year-earlier net income of $4.6 billion, or 55 cents a share. Excluding the Nokia-related accounting charges and some costs for prior layoffs, Microsoft said earnings came to 62 cents a share. The average estimate of Wall Street analysts called for the company to post earnings, excluding the Nokia charges, of 56 cents a share.

Revenue fell 5.1% to $22.18 billion. Excluding effects from the strong U.S. dollar, revenue fell 2%. Analysts polled by Thomson Reuters expected revenue of $22.03 billion.


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