Microsoft’s Profits Slide on Mobile, but Its Cloud Flourishes

Microsoft’s new chief executive has said the two most important trends for the company’s future are mobile and cloud computing. But it is doing much better in cloud computing than in mobile.

In what amounted to its first financial report card since acquiring the mobile business of Nokia, the Finnish handset maker, Microsoft said its overall profits slid because the Nokia business continued to lose money. At the same time, though, Microsoft’s revenues got a big boost from the sales of mobile phones. Microsoft will continue to face a challenge in creating mobile products that excite people, even as it cuts costs to prevent Nokia from dragging the company’s overall profits down.

In the earnings report released Tuesday, Nokia did just that, contributing to a decline in Microsoft’s net income and helping its revenue jump 18 percent with the addition of $2 billion in Nokia device sales.

But there was better news for Microsoft’s cloud business. Annual sales from its commercial cloud business would be $4.4 billion if it sustained its June sales levels for a full year. The company doubled its cloud revenue for the fiscal year that ended June 30.

Satya Nadella, Microsoft’s chief executive, said he was “proud that our aggressive move to the cloud was paying off.”

Mr. Nadella, who took over in February, is trying to quickly move Microsoft away from a focus on the PC and toward an emphasis on developing technologies for mobile and cloud computing.

One fear for investors has been that Microsoft might gut its profits by plowing money into those areas the way it did with its money-losing investment in Internet search. The acquisition of Nokia was of particular concern in that regard. The company’s results on Tuesday, though, offered investors some solace that Mr. Nadella would try to keep a lid on costs as he repositions Microsoft.

For the company’s fiscal fourth quarter, Microsoft reported net income of $4.61 billion, or 55 cents a share, down from $4.97 billion, or 59 cents a share, in the period a year ago.

The company said revenue jumped to $23.38 billion from $19.9 billion in the period a year earlier.

While Microsoft’s profit was lower, investors have been expecting the addition of Nokia’s money-losing phone business to hurt Microsoft for some time. Microsoft said Nokia lowered its overall operating income by $692 million during the quarter.

Analysts were expecting Microsoft to report 60 cents a share in earnings and revenue of $23 billion, according to an average of their estimates by Thomson Reuters. While its profit was lower than expected, Microsoft provided Wall Street with very little information ahead of time about how Nokia would affect its results during the quarter, leading to a lot of educated guesswork by analysts.

Microsoft’s shares rose slightly in after-hours trading after the release of the results.

“It’s better than I thought it was going to be,” Brendan Barnicle, an analyst at Pacific Crest Securities, said of Nokia’s impact on Microsoft’s results.

In the last few weeks, Mr. Nadella has been putting his stamp on the company, first with a manifesto that sought to rally employees around what he views as Microsoft’s core mission, as “the productivity and platform company for the mobile-first and cloud-first world.” In a sign of how Microsoft’s priorities have shifted, Mr. Nadella mentioned the PC only twice in the memo, which was about 3,000 words long, while mentioning the cloud 22 times and mobile computing 11.

There was a similar shift in emphasis in a call Microsoft held with financial analysts to discuss its results. “We didn’t hear about PCs, for the most part,” Mr. Barnicle said. “We heard about the growth in cloud.”

Since the release of the manifesto, people inside and outside Microsoft have been waiting for Mr. Nadella to translate his message into more specifics. An important development came last week when Microsoft announced plans to eliminate about 18,000 jobs at the company over the next year, or about 14 percent of its total work force. The layoffs fell most heavily on the 25,000 employees who joined Microsoft a few months ago after the closing of its deal to acquire Nokia’s mobile business.

In one surprise, Mr. Nadella on Tuesday said that Microsoft’s Bing search engine would be profitable in its 2016 fiscal year, which will end on June 30 of that year. While that is a while off, it is a positive development for Microsoft, which has lost billions of dollars on its Internet search projects as it sought unsuccessfully to compete with Google.

Investors appeared to take some comfort from the progress of Microsoft’s cloud business, a major part of its effort to reposition itself for the future. Daniel Ives, an analyst at FBR Capital Markets, said that Nokia was a “messy business with massive challenges ahead,” but that he believed other parts of Microsoft’s business were performing well.

“The cloud strategy is really starting to pay dividends,” he said.

http://www.nytimes.com/2014/07/23/technology/nokia-bolsters-microsoft-revenue-but-earnings-slip.html

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