By Chelsey Dulaney
(FROM THE WALL STREET JOURNAL 1/29/16)
Microsoft Corp. continued an era of renewed vitality in the latest quarter, showing progress in newer cloud-computing services, as well established business lines such as the Windows operating system.
One continuing drag comes from smartphones, a business Microsoft retooled after it wrote down about 80% of its disastrous $9.4 billion purchase of Nokia Corp.’s handset business. Microsoft said phone revenue declined 49% in the second quarter, excluding currency effects, an especially poor showing after repeated efforts to establish a foothold in the phone market.
Microsoft said it brought in $1.3 billion in revenue in the second fiscal quarter from its Surface computing products. That is up 29% from the year-earlier period, excluding negative effects from a stronger U.S. dollar.
The company also showed further growth in cloud services, a term that refers to selling access to software or raw processing power running in Microsoft’s own data centers.
It said all its cloud businesses are running at an annual rate that is 70% higher than the year-earlier period. Revenue from its Azure service, which competes with cloud-based infrastructure services from Amazon.com Inc., grew 140%, the company said.
Microsoft also is showing strength in its traditional business of operating systems for PCs, despite a declining hardware market. The company said its Windows 10 offering, introduced last summer, earlier this month was running on 200 million computers — up from 100 million for the period ended in September, Microsoft said.
“Windows 10 is outpacing adoption of any of our previous operating systems,” said Satya Nadella, Microsoft’s chief executive, during a conference call with analysts.
Daniel Ives, an analyst at FBR Capital Markets, called demand for Windows 10 “eye-popping.”
Rather than booking revenue from sales of its operating system up front, Microsoft records it gradually, along with deferred revenue generated by the product. As a result, analysts and the company focus on adjusted figures for earnings and revenue.
Microsoft’s profit on that basis rose 8%. Under generally accepted accounting principles, by contrast, its profit declined 15%.
Microsoft, based in Redmond, Wash., has suffered as sales of PCs have declined. Gartner Inc. recently estimated that PC shipments fell 8.3% in the fourth quarter. Rival International Data Corp. put the drop at 10.6% and noted that total unit sales in 2015 fell below 300 million for the first time since 2008.
But Amy Hood, Microsoft’s chief financial officer, said Thursday that revenue from selling Windows to PC makers only declined 5% in the period ended in December. A segment called “More Personal Computing,” which includes revenue from Windows and the company’s Surface tablet computer, decreased 2%, excluding currency effects, the company said.
Microsoft said that its “commercial cloud” businesses were running at an annual revenue rate of $9.4 billion as of the second quarter, compared with $5.5 billion for the same period in 2014.
Revenue for a relatively new reporting segment called Intelligent Cloud — which commingles the Azure cloud-computing service with data-center software installed on customers’ computers, as well as support and consulting — grew 11% excluding currency effects, the company said.
Revenue for Microsoft’s productivity segment, which includes the cloud version of Office and a conventional version, rose 5% on a constant-currency basis, Microsoft said.
In all, Microsoft said its second-quarter net income declined to $5 billion, or 62 cents a share, down from $5.86 billion, or 71 cents a share, a year earlier.
Excluding the effect of revenue deferrals and restructuring charges, adjusted earnings rose to 78 cents from 70 cents a year earlier. Revenue, which fell 10% to $23.8 billion, on an adjusted base rose 3% excluding currency effects.
Analysts polled by Thomson Reuters had expected adjusted per-share profit of 71 cents and revenue of $25.26 billion