Microsoft Earnings Don't Hit Analyst Projections, But Consumer Revs Up

The sky isn't falling for Microsoft, but CEO Satya Nadella clearly has his work cut out for him.
 
The software giant on Tuesday reported quarterly earnings -- the first since Nadella took over for Steve Ballmer -- which fell short of analyst expectations.
 
For the quarter ended June 30, earnings of 55 cents a share fell short of Wall Street’s hopes of 60 cents a share, while revenue of $23.4 billion -- up 17% year-over-year -- beat estimates.
 
The earnings fail was largely attributed to costs associated with Microsoft’s Nokia acquisition.
 
Still, an optimistic Nadella cited Microsoft’s commercial cloud business -- revenue from which doubled year-over-year to a $4.4 billion annual run rate -- as evidence that the company is moving in the right direction.
 
“I’m proud of the results we delivered this quarter,” Nadella told analysts on Microsoft’s Tuesday earnings call.
 
During the quarter, devices and consumer revenue also grew 42% to $10 billion. Of particular note, Bing search advertising revenue grew 40%, while the unit’s domestic share of share of search grew to 19.2%. However, “display [advertising] revenue remains soft,” Amy Hood, Microsoft’s EVP and CFO, told analysts on the company’s earnings call.
 
Last week, Microsoft announced plans to reduce its workforce by as many as 18,000 employees -- or about 14%. Nadella -- who telegraphed the move in a proceeding email -- said most of the cuts would be felt within the Nokia phone business.
 
“Nokia Devices and Services is expected to account for about 12,500 jobs, comprising both professional and factory workers,” Nadella explained in a letter to employees. The reductions are expected to result in a pretax charge of $1.1 billion to $1.6 billion, according to the company.

Also, as part of the restructuring, Microsoft is dismantling its Xbox Entertainment Studios division, which has about 200 employees producing original programming. Nadella said on Tuesday that closing Xbox Entertainment Studios was necessary to focus more fully on gaming, which he called the unit’s “core business.”
 
Nadella, who said most of the restructuring will occur over the next six months, noted that Microsoft will also be adding roles in certain “strategic areas.”
 
Since stepping in for Steve Ballmer earlier this year, Nadella has stressed the importance of accountability and strategic agility in countering Microsoft’s highly corporate culture. He reiterated those themes last week, explaining in his letter: “We plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making.”
 
“This includes flattening organizations and increasing the span of control of people managers,” Nadella explained. “In addition, our business processes and support models will be more lean and efficient with greater trust between teams."
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