CEO Nadella Touts Microsoft's Transition Plans In Earnings Call


Microsoft executives Tuesday painted a picture of a company in transition, yet headed in the right direction, when it reported solid results for the company's fourth quarter -- the vendor's first as owner of Nokia's devices and services business.

"In Q4, on an operating basis, we grew revenue 10 percent and operating income 12 percent," said CEO Satya Nadella in a conference call with financial analysts. "We accelerated our commercial cloud business to a $4.4 billion annual run rate. And perhaps more importantly, we made bold and disciplined decisions to define our core as a productivity and platform company for the mobile first, cloud first world."

Microsoft reported revenue of $23.38 billion for its fourth quarter ended June 30, up more than 17 percent from the year-ago period. Net income for the quarter fell more than 7 percent from a year earlier to $4.61 billion.

[Related: Partners: Nadella's 'Overdue' Layoffs Set Microsoft Up For Success]

Microsoft reported revenue for its fiscal year ended June 30 of $86.83 billion, up more than 11 percent from fiscal 2013. Net income for the year rose 1 percent from a year earlier to $22.07 billion.

Nadella, who took over as Microsoft CEO on Feb. 4, has been reshaping the company's direction, which his predecessor Steve Ballmer envisioned as turning the software giant into a services and devices company. The acquisition of substantially all of Nokia's devices and services business on April 25 was a major part of Ballmer's strategy.

Microsoft said last week it would layoff some 18,000 workers, including 12,500 from Nokia, taking a charge of $1.1 billion to $1.6 billion in fiscal 2015 to cover the costs associated with the restructuring.

"Mobility for us goes beyond just devices," Nadella said, pointing to the vendor's Office 365 cloud applications, Enterprise Mobility Suite and Software-as-a-Service applications, such as Dynamics CRM.

Nadella also said Microsoft "will streamline the next version of Windows from three operating systems into one, single converged operating system for screens of all sizes." Microsoft currently offers Windows 8.1 for desktop and laptop PCs, Windows RT for the Surface tablet computer and Windows Phone for smartphones.

Nadella made it clear he has no plans to sell off Microsoft's Xbox operations, a move some investors have advocated. While he said that focusing on a core set of products is important, the CEO called Xbox "a special opportunity" and added, "It's equally important to place smart, bold bets in other areas where we have the ability to add value and have impact. That's what we're doing with Xbox."

The CEO said Microsoft would focus on Xbox as a gaming console, closing Xbox Entertainment Studios and "streamline investments" in music and video.

Fourth-quarter revenue from the devices and consumer segment grew 42 percent to $10 billion. That included $4.69 billion in licensing revenue, up more than 9 percent from a year earlier.

Microsoft said it sold 5.8 million Lumia smartphones and 30.3 million other "non-Lumia" mobile phones following the close of the Nokia deal. Phones with low price points "drove a majority of the Lumia Smartphone [sales] volumes," the company said.

Microsoft is now reporting the financial performance of "phone hardware" as part of the company's Devices and Consumer segment. Fourth-quarter phone hardware sales were just under $1.99 billion, Microsoft said.

The company expects its phone business to achieve break-even status on an operating basis in fiscal 2016, CFO Amy Hood told analysts on Tuesday's call.

Microsoft also recognized $382 million in revenue in the fourth quarter from the Microsoft-Nokia contractual relationship related to joint strategic initiatives that were terminated as a result of the acquisition. The quarter also included $127 million in expenses related to the acquisition and integration of Nokia with the rest of Microsoft.

Windows OEM revenue grew 3 percent, driven by 11 percent growth in Windows OEM Pro revenue, the company said. The number of Office 365 Home and Personal subscribers reached more than 5.6 million in the quarter, with 1 million of those added during the quarter.

Commercial revenue grew 11 percent to $13.48 billion in the quarter, including 147 percent growth in commercial cloud revenue and 11 percent growth in Windows volume licensing revenue. Revenue from server products, including Azure, SQL Server and Systems Center, grew 16 percent year-over-year.

PUBLISHED JULY 22, 2014