Microsoft beat Wall Street expectations for revenue but fell short on profit in its fiscal fourth-quarter results — the first since it finalized its purchase of Nokia’s phone business and since new CEO Satya Nadella outlined his direction for the company and disclosed planned layoffs of 18,000 employees.
In a conference call with analysts after the earnings release Tuesday, Nadella and Chief Financial Officer Amy Hood talked a bit about Microsoft’s direction in fiscal year 2015, particularly its emphasis on productivity offerings and the cloud.
But they gave no new specifics on the layoffs — nor on new restrictions affecting vendors and temps working at Microsoft — and none of the analysts asked about it.
For the quarter ended June 30, Microsoft reported revenue of $23.38 billion, net income of $4.61 billion and earnings per share of 55 cents.
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Analysts had expected $23.01 billion in revenue, profit of $5.04 billion and earnings per share of 60 cents, according to a Bloomberg survey of analysts.
Chris Suh, Microsoft’s general manager of investor relations, said the lower-than-expected earnings per share reflected the fact Microsoft had not offered guidance on the impact of the Nokia deal, which closed in April.
Microsoft didn’t give it, Suh said, because “we didn’t have a point of view on the business that I would consider to be reliable enough for us to stand behind at that point.”
Suh said that taking into account the impact of acquiring the Nokia business, plus other factors such as a catch-up on prior-year taxes, earnings per share for the quarter would have been 66 cents.
A year ago, Microsoft had posted revenue of $19.9 billion with earnings per share of 59 cents and net income of $4.97 billion.
Those figures reflected a $900 million write-down of Surface RT inventory. Adjusted for that, Microsoft had said earnings per share would have been 66 cents.
Excluding Nokia, “it was a pretty robust quarter,” said Sid Parakh, an analyst with Seattle investment firm McAdams Wright Ragen. “There was strong traction in the enterprise [corporate] space, especially with cloud products.”
Michael Yoshikami, fund manager with Destination Wealth Management, called the numbers “a little soft. … I think it underscores why they needed to make the 18,000 job cuts they need to be making because they’re clearly in transition.
“If you look at what they’re doing on the Nokia side, it looks like they’re clearly moving away from some of (past-CEO Steve) Ballmer’s strategy. And that’s going to take time.”
For fiscal 2014, which ended June 30, Microsoft had revenue of $86.83 billion, profit of $22.07 billion and earnings per share of $2.63 — up 12 percent, 1 percent and 2 percent, respectively, from a year ago.
Analysts were expecting Microsoft to report revenue of $86.46 billion, profit of $22.54 billion and earnings per share of $2.69, according to a Bloomberg survey.
Much of the quarter’s growth was consistent with what drove previous results: mainly Microsoft’s corporate customers, but also growth in consumer offerings.
Company executives were particularly excited about revenue growth from its commercial-cloud offerings, including Office 365 for business and Azure, citing its 147 percent growth in the quarter and the projection the cloud business in fiscal 2015 would bring $4.4 billion in revenue if the number of subscribers stays the same.
Nadella said on the conference call that he sees huge opportunities in the cloud and in offering Microsoft’s productivity software across mobile devices, including those running iOS and Android, as well as Windows.
In fiscal year 2015, he said, the company is increasing its investments in research and development, and in sales for its “digital work and life” businesses, even as it cuts total operating expenses.
With Xbox, the company will focus on gaming and “streamline our investments in music and video,” Nadella said, in addition to the previously announced decision to close Xbox Entertainment Studios.
By fiscal year 2016, the company expects Bing to be profitable, and the phone business acquired from Nokia to reach operational break-even.
Here’s how the various groups within each of Microsoft’s two broad segments performed in the fourth quarter:
Devices & Consumer:
Overall, this segment reported revenue of $10 billion, up 42 percent.
• Licensing (Licenses from Windows device manufacturers, consumer Windows, Windows Phone, Office consumer, and patents): $4.69 billion, up 9 percent.
The increase in revenue is due in part to recognition of $382 million from the end of the commercial agreement with Nokia, and is offset by a decline in royalty revenue.
Licensing revenue from Windows device manufacturers grew 3 percent.
• Computing & Gaming Hardware (Surface, Xbox and Xbox Live subscriptions, second- and third-party video games, and peripherals. This category was previously called “Hardware.”): $1.44 billion revenue, up 23 percent.
Surface revenue was $409 million. Microsoft did not give a figure for the cost of revenue, which included inventory adjustments for newer devices (Surface Pro 3) coming onto the market as well as “a decision to not ship a new form factor” — likely the much-rumored Surface Mini.
Xbox platform revenue increased $104 million, or 14 percent, driven largely by console revenue.
• Phone Hardware (Windows Phone. This is a new category, established since the Nokia deal closed): $1.99 billion.
The cost to achieve the $1.99 million revenue was $1.93 million.
After Microsoft’s acquisition of Nokia’s phone business, Microsoft sold 5.8 million Lumia smartphones — most of them lower-priced — and 30.3 million non-Lumia phones.
• Other (Bing and MSN, Office 365 Home and Office 365 Personal, first-party video games, marketplaces such as Windows Store, Windows Phone Store and Xbox Live transactions, as well as Microsoft retail stores): $1.88 billion, up 20 percent.
Bing search-advertising revenue rose 40 percent, due mainly to higher revenue per search, increased search volume and the end of the North American revenue-per-search guarantee payments to Yahoo in the previous year. The increase was offset by an 11 percent decline in display-ad revenue.
Office 365 Home and Office 365 Personal revenue increased $125 million, or 21 percent. There were 5.6 million subscribers, a gain of 1 million from the previous quarter.
Overall, this segment reported revenue of $13.48 billion, up 11 percent.
• Licensing: (Windows enterprise, Windows Server, SQL Server, Visual Studio, System Center, Office for businesses, Dynamics, Skype, Lync, SharePoint, Exchange, Windows Embedded): $11.22 billion, up 6 percent.
Windows volume-licensing revenue increased 11 percent.
Revenue for server products grew $577 million, or 14 percent.
Office commercial revenue, including Office 365, grew 4 percent.
• Other (enterprise services, cloud services, including Office 365 for businesses, Azure, Dynamics CRM Online): $2.26 billion revenue, up 44 percent.
Commercial cloud revenue grew 147 percent, due largely to triple-digit growth in commercial Office 365 and Azure.
Microsoft shares closed flat at $44.83 Tuesday and were trading at $45.45 after hours, up 1 percent.