Microsoft's Profits Fall On Higher Costs -- 4th Update

By Shira Ovide 

Microsoft Corp.'s charmed financial success hit a snag.

In Microsoft's quarterly earnings report Monday, the company's shining star--its roster of software including Windows, Office and computer-server products sold to corporations--came back to Earth with sales that rose 5% from a year earlier. That was a bit below analyst expectations, and lower than the 9.5% and 10.5% growth rates for those businesses in the two prior quarters.

Amy Hood, Microsoft's chief dinancial officer, said the comparatively weaker showing was due in part to customers shifting from traditional versions of the Office software bundle that are installed on personal computers to Web-friendly Office 365 editions that funnel less money into Microsoft's pockets, at least in the short term.

In an interview Monday, Ms. Hood also said the strong U.S. dollar compared with foreign currencies, particularly those of China and Japan, weighed on revenue from Microsoft's commercial-software products.

U.S. companies that sell products abroad in local currencies must convert the revenue to U.S. dollars on their books. When the dollar is strong relative to other currencies, as it is now, each sale effectively is discounted. Several big U.S. companies have taken a financial hit from these unexpected currency moves.

The run of high growth created a double-edged sword for Microsoft, encouraging high expectations following a year in which new Chief Executive Satya Nadella won over Wall Street with smart strategic moves and a willingness to shake up the company's old ways of doing things. The question now is whether the mildly disappointing commercial-software sales were a momentary dip or a sign that Microsoft's juggernaut has run out of steam.

The hiccup in Microsoft's corporate results, along with gross profit that was softer than expected, helped spark a 2.7% selloff of Microsoft shares in after-hours trading Monday. Before the release of the earnings report, Microsoft's shares ended the regular market day at $47.01, up about 28% over the past 12 months.

Ms. Hood said Microsoft's corporate customers continue to reup for the company's products, and long-term contracts for Web-friendly software and other products would benefit the company in the long run.

"I tend to believe we stay on a strong trajectory in that business," she said.

Her confidence, and that of many investors, is predicated on a payoff from Microsoft's focus on emerging corporate technology trends like cloud computing. Microsoft said sales in its cloud businesses--which include Office 365, the Azure computing-rental service and a tool for salespeople to keep tabs on clients--more than doubled in the quarter. The cloud businesses are small, at roughly 5% of Microsoft's total revenue, but they are hugely important to the company's future.

In all, the company posted net income of $5.86 billion, or 71 cents a share, in the three months ended Dec. 31. In the same quarter a year earlier, Microsoft's net income was $6.56 billion, or 78 cents a share. Microsoft was expected to post earnings of 71 cents a share, according to the average of analyst estimates gathered by Thomson Reuters.

The company's bottom line continues to be dragged down by costs related to job cuts it began last summer and by costs to absorb the Nokia mobile-phone business it bought last April. Microsoft also said it took a hit of 4 cents a share stemming from an IRS audit adjustment.

Overall revenue rose 8% to $26.47 billion. Wall Street analysts expected revenue of $26.3 billion.

Write to Shira Ovide at [e-mail]

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