By Shira Ovide
Microsoft Corp. Chief Executive Satya Nadella had warned
investors not to expect much growth from his company for a few
months. He was wrong.
Microsoft's quarterly financial results released Thursday outdid
the low expectations, giving Mr. Nadella breathing room to invest
in new businesses without worrying about second guesses from
investors.
Microsoft said sales in the third quarter ended March 31 rose
nearly 6.5% from a year earlier to $21.7 billion, in part thanks to
the inclusion of sales from Nokia Corp.'s mobile-phone business,
which Microsoft didn't own a year ago. That beat Wall Street
expectations even though a strong U.S. dollar dragged down
sales.
"We did a little bit better in lots of places," Microsoft Chief
Financial Officer Amy Hood said in an interview.
Microsoft in January had cautioned its sales growth would slow
through the summer, as the company ran out of steam for what had
been enviable growth in sales of Windows, Office and other software
sold to businesses. The company's stock price, and Wall Street's
expectations for the company's financial results, came down as a
result.
The continuing weak market for new personal computers, which
propel sales of Microsoft's Windows and Office software, continued
to cut into revenue from those cash-cow products. But Microsoft
more than made up the difference by selling more of less-heralded
products such as software for computer servers and databases used
by corporations.
The quarterly report represents promising early results of Mr.
Nadella's effort to guide the company through a generational shift.
The CEO is trying to steer Microsoft away from software installed
on corporate and personal computers toward subscriptions to
services delivered over the Internet.
Investors have responded favorably as Mr. Nadella has emphasized
Web-friendly versions of the Office productivity software bundle
and business offerings such as databases and analytics.
Microsoft's cloud-computing businesses have made strides,
including the Web-friendly Office 365, Azure computing on tap and
an online sales tool. Cloud sales more than doubled in the quarter
to $1.5 billion, a key benchmark as Microsoft competes with
Amazon.com Inc., Google Inc., International Business Machines Corp.
and others for cloud dominance.
The transition's long-term financial impact remains uncertain,
however.
This summer, Mr. Nadella will make his biggest bet yet with its
next-generation operating software Windows 10, which will drive
personal computers, smartphones and tablets. For the first time,
Microsoft is pitching Windows as an entry point for a continuing
relationship with customers. It aims to make more money from areas
like videogame sales or Web-search advertising that previously
contributed minor revenue.
Overall in the quarter, Microsoft said its net income fell
nearly 12% to $4.99 billion, or 61 cents a share, from $5.66
billion, or 68 cents a share, a year earlier. Profit fell, partly
due to an increase in spending on research and development, as well
as lingering costs from widespread job cuts the company started
last summer.
In a statement that is likely to cheer investors anxious about
Microsoft's foray into making its own computing devices, Ms. Hood
told analysts the company would "aggressively focus" on costs for
its hardware businesses such as Nokia smartphones, Surface
computers and Xbox videogame consoles.
Wall Street analysts haven't been fans of these businesses. In
part, the company's promise for hardware cost discipline reflects
poor sales of Microsoft's smartphones, which constitute a tiny
share of the world-wide market.
Other than Nokia, Microsoft's businesses all performed well,
including all-important sales of corporate software, where revenue
increased 4.6% from a year ago, besting expectations. Microsoft's
sales forecast for the quarter ending in June was more optimistic
than Wall Street's downbeat expectations.
Write to Shira Ovide at shira.ovide@wsj.com
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