This Article is From Jul 22, 2015

A $7 Billion Charge at Microsoft Leads to Its Largest Loss Ever

A $7 Billion Charge at Microsoft Leads to Its Largest Loss Ever

Seattle: An accounting charge wiped out Microsoft's profit for the quarter, leading to its largest loss ever, the company said Tuesday, making clear the cost of its missteps in the mobile business.

The $7.5 billion accounting charge, stemming from Microsoft's troubled acquisition of Nokia's cellphone business, was disclosed by the company earlier this month, along with plans to eliminate 7,800 jobs, mostly in the company's phone operations. While the accounting charge was on paper and will not diminish the company's huge cash hoard, it was a psychic blow to Microsoft, one of the biggest moneymakers in tech.

Investors, however, seemed to mostly look beyond Microsoft's struggles in the phone market. They appeared to focus on two of the company's most important businesses, Windows and Office, which showed some signs of weakness. Those were somewhat offset by strong growth in its cloud services business, Xbox games and Surface tablets.

For its fiscal fourth quarter, which ended June 30, Microsoft said its net loss was $3.2 billion, or 40 cents a share, compared with net income of $4.61 billion, or 55 cents a share, during the same period last year.

For the full year, Microsoft had a profit of $12.19 billion, or $1.48 a share, down from $22.07 billion, or $2.63 a share, the previous year. Revenue for the quarter fell 5 percent, to $22.18 billion. For the full year, revenue rose to $93.58 billion from $86.83 billion.

Microsoft's shares fell about 4 percent in after-hours trading, though some analysts sounded a relatively positive note about the company's results. Brendan Barnicle, an analyst at Pacific Crest Securities, called Microsoft's results "great" compared with the results of other software companies in the corporate software market. Daniel Ives, an analyst at FBR Capital Markets, graded it a "B" quarter.

After excluding charges related to its Nokia acquisition, which totaled $8.4 billion including expenses related to the job cuts, Microsoft said it earned 62 cents a share, better than the 56 cents a share average of analyst estimates compiled by Thomson Reuters.

Microsoft's biggest challenge is a PC market left limping by the rise of mobile devices. The company has tried to adjust to that new reality partly by transitioning its traditional software franchises, like Office, to become cloud services that customers subscribe to rather than purchase outright. That change results in lower revenue in the near term, as the company spreads out customer payments over time.

The company added almost 3 million consumers to its Office 365 subscription business, bringing to 15.2 million the number of users paying for access to that service. At the same time, consumer Office revenue declined 42 percent, partly because the company recognizes revenue from the business in installments over time. Office revenue from the commercial market dropped 18 percent for similar reasons.

Microsoft said revenue from its devices and consumer business declined 13 percent to $8.7 billion, in part because the licensing revenue it gets from selling its Windows operating system to PC makers declined 22 percent. That drop is partly because of PC makers, especially in the consumer market, limiting the amount of inventory in stores ahead of the introduction of Windows 10, a new version of the company's operating system that will be released next week.

Satya Nadella, Microsoft's chief executive, said in a phone call with analysts Tuesday that he believed the company's new operating system would "return Windows to growth."

While the company's stumbles in smartphones have shown the bruising downsides of the hardware business for Microsoft, it had success with other devices, including its Surface tablet, the revenue from which grew 117 percent to $888 million. Revenue from its Xbox game business rose 27 percent. In total, Microsoft said it had nearly $2 billion in computing and gaming hardware revenue in the quarter.

Revenue from Microsoft's overall commercial cloud business grew 88 percent during the quarter, one of the brightest spots in its results.

Microsoft is hoping to put the bad news about its mobile phone business behind it as it enters another, potentially important, chapter in its struggle to regain influence in the technology business. With Windows 10, for the first time it will give away its operating system to existing customers, hoping to motivate millions of people to put the new software on their PCs quickly.

Windows 10 will first be available to people with PCs, but in the months ahead Microsoft will make the operating system available to people using smartphones, Xbox game consoles and eventually other hardware. It wants to give app developers a common foundation across different categories of devices, using its strength in PCs to lift up its weakness in the mobile business.

That is the plan, at least. Google's Android software and Apple's iOS, the operating system behind the iPhone and iPad, have evolved into what seems like an unshakable duopoly in the mobile business. Developers have largely shunned Microsoft's earlier versions of Windows for smartphones. That has made the software unattractive for users, who cannot find many apps for the devices.