Microsoft posts largest-ever net loss after Nokia writedown

A Nokia mobile phone lies on a tablet computer showing logos of Microsoft.
A Nokia mobile phone lies on a tablet computer showing logos of Microsoft. PHOTO: REUTERS

SEATTLE (BLOOMBERG) - Microsoft reported its largest-ever quarterly net loss, hurt by a US$7.5 billion writedown after the purchase of Nokia's handset unit failed to rescue the software maker's mobile business.

The net loss in the fourth quarter, which ended June 30, amounted to US$3.2 billion, and sales 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 cents a share. Analysts on average projected profit of 58 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, the gains were overshadowed by the writedown, an acknowledgment that the Nokia deal had lost almost all its value after a little more than a year.

Chief Executive Officer Satya Nadella announced 7,800 job cuts and said he plans to narrow the focus of the mobile business to try to win customers in specific markets.

"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 Inc., 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 3.9 per cent in extended trading following the report after closing at US$47.28. The shares 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 cents a share.

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, Nadella's predecessor - was a flop, and Microsoft's smartphone business continued to lose money while gaining little ground with mobile users.

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 but should also reduce costs in the money-losing business, she said.

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, and Microsoft has seen lacklustre demand for phones and tablets that run on the platform. Worldwide PC shipments fell 9.5 per cent in the June quarter, 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 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 Hood, though she declined to specify a number.

Revenue in the Commercial Licensing division, which includes copies of Windows and Office sold to corporate customers, fell 7 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.

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