Microsoft's profit takes a hit as new strategy takes shape

Microsoft misses analyst estimates after Nokia acquisition brings added costs

The purchase of Nokia’s mobile-phone unit cut into Microsoft’s profit, but a surging cloud business and a new effort to launch its applications on a greater number of gadgets kept analysts optimistic about the company’s prospects.

The maker of Windows, Office, Xbox and a number of mobile devices said its fourth-quarter earnings per share were $0.55, behind estimates of $0.60, with the Nokia acquisition costing about $0.08 a share.

Sales for the quarter reached $23.4 billion, up 18% from the fourth quarter of last year, with a $2-billion boost provided by Nokia’s acquisition in mid-April.

Daniel Ives, an analyst at FBR Capital Markets, described the mixed results as relieving for investors amid a “choppy environment.”

“As integration goes on between Nokia and Microsoft, there’s going to be those unexpected speed bumps, but the street is looking through that,” Ives said. “You see a lot more optimism around shares.”

Part of the reason for optimism continues to be new chief executive Satya Nadella, who reiterated in a conference call Tuesday that’s he committed to making what he called “bold and disciplined decisions.”

Nadella announced last week that he plans to cut up to 18,000 positions, about 14% of Microsoft's workforce and the largest reduction in company history. Most of the cuts come from adding Nokia, which brought with it 20,000 employees.

The restructuring moves Microsoft away from its recent work on building smartphones, tablets and Xboxes. Instead, Nadella wants engineers devoted to developing Microsoft-branded apps and other software that show up everywhere, including on Androids and iPhones.

“We will be relentless in our focus,” Nadella said Tuesday. “Everything we do starts with digital life and work experiences.”

Microsoft’s fourth quarter report showed some of the reasons behind the new emphasis. The company saw growth in sales of Office. And revenue from Microsoft cloud services, which holds information online for other companies, rose 147%, reaching $564 million.

The strategy shift could be costly short-term, some analysts said.

"Half a billion dollars on 24 billion a quarter doesn’t mean sqaut," said Sterne Agee's Robert Breza. "It’s very valuable strategically, but the question is how fast can they turn it around. The growth is going to take some time."

The Bing search engine, for example, saw advertising revenue rise 40% on higher ad rates and search volume. But Nadella estimated that it would take up two years for Bing to be profitable on its own.

Microsoft closed its fiscal year with $87 billion in revenue, up from $78 billion in 2013.

Shares of the Redmond, Wash., company were down a penny in Tuesday’s trading to $44.83, though the figure was up about 5% from a week earlier, when rumors of the imminent layoffs began to emerge. In after-hours trading, shares topped $45.00, their highest level since early 2000.

“You finally have a general leading the troops in the right direction,” Ives said. "Microsoft looks strong heading into 2015."

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Copyright © 2015, Los Angeles Times


4:13 p.m.: Updated with comments from Microsoft conference call and an analyst.