How Nokia both helped and hindered Microsoft's earnings

The Nokia Devices and Services business helped boost Microsoft's revenue, but hurt profits

Microsoft paid more than $US7 billion for Nokia's handset and services business, and the jury is still out as to what it means for its future. In the past quarter it boosted Microsoft's revenue but also ate into its profit.

Microsoft's revenue for the quarter ended June 30 grew 18 per cent from last year to $US23.4 billion, boosted by an additional $US2 billion from Nokia. That helped Microsoft beat the consensus analyst forecast of $US23 billion, according to a poll by Thomson Reuters.

But the Nokia deal, which closed April 25, almost a month into the quarter, also stung Microsoft's profits to the tune of $US0.08 a share, causing Microsoft to miss by a nickel Wall Street's target of $US0.60 a share. In the end, its per-share earnings were down 7 percent year over year.

CEO Satya Nadella said he was satisfied with the sales of lower-priced Lumia and non-Lumia phones, and that he expects higher-end Lumia phones to sell better as Microsoft differentiates them with its productivity apps and services.

Microsoft sold 5.8 million Lumia smartphones and 30.3 million non-Lumia, lower-end feature phones in the quarter.

The Nokia business - now called Phone Hardware and part of the Devices & Consumer Division - should be at break-even point by fiscal year 2016, CFO Amy Hood said.

Phone Hardware had operating expenses of about $US750 million in the two months that it was part of Microsoft in the quarter. Annualized, that would have been about $US4.5 billion in operating expenses, according to Hood.

"But we are aggressively working to drive synergies across key functions such as development, supply chain and operations as we integrate and right-size the business," she said.

Part of that "right sizing" is the massive round of layoffs -- the largest in the company's history -- announced last week. Microsoft will cut about 18,000 jobs over the next 12 months, and about 12,500 are expected to come from the Nokia business.

Nadella, who changed Steve Ballmer's description of Microsoft as a "devices and services" company to a "platform and productivity" company, clarified his goals for Microsoft as a hardware maker.

Microsoft will only develop its own hardware when it feels it can break new ground or use devices as vehicles to sell its productivity products. Nadella cited as an example the Surface Pro 3, which Microsoft says can act as a tablet and a laptop to suit both home and work needs.

"Our approach to first-party hardware going forward is clear -- at times we'll develop new categories like we did with Surface. And we will responsibly make the market for Windows Phone," he said. "However, we're not in hardware for hardware's sake, and the first-party device portfolio will be aligned to our strategic direction as a productivity and platform company."

His comments may fuel further speculation that Nadella isn't as bullish about the Nokia acquisition, which was seen initially as Microsoft's attempt to be more like Apple -- in tight control of both software and hardware.

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

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Juan Carlos Perez

IDG News Service
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