Microsoft drops after largest quarterly loss on Nokia charge

[SEATTLE] Microsoft shares fell more than four per cent in Europe trading after the software maker posted its largest-ever quarterly loss, hurt by a US$7.5 billion writedown related to its flopped purchase of Nokia's handset unit.

The net loss in the fourth quarter, which ended June 30, amounted to US$3.2 billion, and revenue fell 5.1 per cent to US$22.2 billion, Microsoft said Tuesday in a statement. Excluding the Nokia charge and costs related to job cuts, profit was 62 US cents a share. Analysts on average projected profit of 58 US cents on sales of US$22 billion, according to data compiled by Bloomberg.

While revenue from Microsoft's cloud-computing business rose on growth in the Azure and Office 365 programs, sales of Windows to PC makers and corporate customers sagged. The writedown was an acknowledgment that the Nokia deal had lost almost all its value after failing to rescue the company's smartphone business. In response, chief executive officer Satya Nadella announced 7,800 job cuts and a narrower focus in mobile.

"Phones continue to struggle and it was pretty much in line in the cloud initiatives," said Dan Morgan, a senior portfolio manager at Synovus Securities, which owns Microsoft shares. "They're still progressing but people would like them to move faster." The strength of the US dollar hurt revenue and earnings in the recent quarter, Microsoft said. Excluding the effect of currency fluctuations, revenue would have declined 2 per cent.

Microsoft shares fell 4.3 per cent to the equivalent of US$45.23 at 8.53 am in Frankfurt. In US trading, the stock rose 8.6 per cent in the quarter, while the Standard & Poor's 500 Index fell less than 1 per cent.

Earnings were reduced by a total of US$8.4 billion in charges, including the writedown of its Nokia purchase and restructuring charges related to job cuts and other integration efforts. Including those costs, the net loss in the fourth quarter was 40 US cents a share, the Redmond, Washington-based company said.

Microsoft acquired Nokia's phone unit in April 2014 for US$9.5 billion, including US$1.5 billion in acquired cash. The addition of the unit - a deal struck under CEO Steve Ballmer, Mr Nadella's predecessor - did little to gain ground with mobile users, and Microsoft's smartphone business continued to lose money.

Microsoft expects currency-exchange rates to continue to affect revenue in the fiscal year that started July 1, chief financial officer Amy Hood said in an interview. Currency will impact the company's commercial business even more in the first half of the year than it did in the fourth quarter, she said. Changes to narrow the focus of the phone-hardware business by releasing far fewer models and exiting some countries will "significantly" lower sales yet should also reduce costs in the money-losing business, she said.

"You will see improving results on the bottom line," she said of the mobile business. As a result, the company cut operating expense forecasts for the year to US$32.1 billion to US$32.4 billion.

Microsoft is releasing a new version of its flagship operating system, called Windows 10, on July 29. Sales of Windows have suffered as the personal-computer market heads toward its fourth straight year of shrinking unit sales. Worldwide PC shipments fell 9.5 percent in the June quarter, Mr Gartner said.

Nadella said he expects Windows 10 to restore growth to the Windows business, though the biggest impact will start two quarters from now.

"My bullishness for Windows 10 is more in the second half of the fiscal year," he said on the call.

Under Nadella, Microsoft has refocused on cloud products and productivity applications. The company released new Azure data-center services and Office 365 programs, and brought out versions of its mobile applications for Apple Inc. and Google operating systems.

In the fourth quarter, commercial cloud revenue climbed 88 per cent, Microsoft said. Sales in the unit that includes those cloud programs rose 36 per cent to US$3.08 billion, compared with a US$3.09 billion average estimate of analysts. The commercial cloud business now has an annualized revenue run rate of more than US$8 billion, the company said. Azure revenue and usage rose at a percentage in the "triple digits," said Mr Hood, though she declined to specify a number.

"This wasn't a great quarter but it wasn't a harbinger of the beginning of the end either," said Kim Forrest, an analyst at Fort Pitt Capital Group, which owns Microsoft shares.

Revenue in the Commercial Licensing division, which includes copies of Windows and Office sold to corporate customers, fell seven per cent to US$10.5 billion. That matched analysts' average projection. Besides currency, part of the decline came from companies switching from traditional products to Office in the cloud.

Sales of Windows to PC makers to pre-install on machines dropped 22 per cent, the company said. In the year-earlier quarter, customers were buying PCs ahead of the expiration of support for Windows XP, the company said.

Device and Consumer Licensing sales, which include consumer versions of Windows, declined 34 per cent to US$3.23 billion. Analysts had expected US$3.25 billion.

Unearned revenue, a measure of future sales, was US$25.3 billion, compared with the US$26 billion average estimate of six analysts surveyed by Bloomberg.

BLOOMBERG