Microsoft Earnings: Massive Write-Down Leads to Largest-Ever Quarterly Loss

Source: Microsoft.

Microsoft reported a $3.2 billion quarterly loss after the software titan was forced to take a $7.5 billion impairment charge related to its failed acquisition of Nokia's mobile device business.

Excluding the Nokia writedown and $940 million in restructuring charges, Microsoft's adjusted earnings per share came in at $0.62, ahead of Wall Street's estimates of $0.58. Microsoft's $22.2 billion in reported revenue also surpassed consensus estimates of $22 billion, yet this figure represented a 5% year-over-year decline.

Gross margin also declined, falling 7% to $14.7 billion, and adjusted operating income decreased 3% to $6.4 billion.

It should be noted that currency fluctuations dampened Microsoft's results. On a constant currency basis, revenue and gross margin would have declined 2% and 3%, respectively, and operating income would have declined 1%.

A weak PC market added to the pain, with Windows OEM revenue falling 22% following the XP end-of-support refresh cycle.

Bright spots There were, however, some positives in the report. Commercial cloud revenue surged 88% (and 96% in constant currency) -- driven by strong results for Microsoft's Azure enterprise cloud-computing platform and Office 365 cloud-based productivity software -- and is now on an annualized revenue run rate of over $8 billion.

Microsoft also added nearly 3 million Office 365 consumer subscribers during the quarter, bringing its total subscriber base to 15.2 million and demonstrating further progress toward successfully shifting to a cloud-based model for its all-important Office franchise.

Surface revenue was impressive as well, leaping 117% to $88 million. Strong sales of the Surface 3 and Surface Pro 3 bode well for continued share gains in the tablet arena -- a needed positive, especially considering Microsoft's struggles in the mobile-phone market.

Xbox and Bing likewise delivered solid results, with Xbox revenue jumping 27% on strong console sales, and search advertising revenue rising 21% as Bing's U.S. market share increased 110 basis points to 20.3%.

Looking ahead Management is looking forward to the upcoming launch of Windows 10 on July 29, with the new software expected to fortify Microsoft's ecosystem. Yet with Windows 10 being offered as a free upgrade to users of Windows 7 and 8, it remains to be seen how much of a positive impact the new OS will have on Microsoft's revenue and earnings.

Still, management remains optimistic. "Our approach to investing in areas where we have differentiation and opportunity is paying off with Surface, Xbox, Bing, Office 365, Azure, and Dynamics CRM Online all growing by at least double digits," said CEO Satya Nadella in a press release. "And the upcoming release of Windows 10 will create new opportunities for Microsoft and our ecosystem."

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