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 shira.ovide@wsj.com
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