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Microsoft Beats Profit Expectations in Second Quarter
Posted January 27, 2017
Microsoft Beats Profit Expectations in Second Quarter
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By Matt Day. Updated January 27, 2017 8:54AM

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Microsoft is reaping the rewards of its push toward on-demand business software, beating Wall Street expectations for the company's second-quarter earnings.

With its tiny presence in mobile markets and facing chronically weak personal-computer sales, Microsoft has reoriented itself toward products delivered over the internet, investing heavily in reshaping its product line and building new tools.

The company was buoyed during the quarter by sales of new editions of server and database software that topped Microsoft's own expectations.

Meanwhile, Microsoft's Azure network of on-demand data storage and processing power, the main challenger to Amazon.com dominance in that field, saw revenue rise 93 percent from a year earlier.

Overall, the Redmond company posted an adjusted profit of 83 cents a share during the last three months of 2016, topping both analysts' estimates and the adjusted 78-cent profit reported a year earlier.

Adjusted revenue was $26.1 billion, up 2.2 percent from a year earlier.

The adjusted results include $2 billion in sales of Windows 10 that Microsoft technically defers to future years, an accounting practice designed to spread the cash generated by sales of the operating system over the lifetime of the devices it is installed on.

Stripping out those Windows sales and other one-time items, Microsoft's unadjusted revenue stood at $24.09 billion during the quarter. Net income on that basis was $5.2 billion, or 66 cents a share, compared with $5 billion, or 62 cents a share, a year earlier.

The results, reported shortly after the market closed regular trading Thursday, gave Microsoft stock a boost in after-hours trading, rising to $65.19, up 1.4 percent.

It closed regular trading at $64.27, an all-time high.

"We have continued to build momentum," Chief Executive Satya Nadella said on a conference call with analysts.

The company's Intelligent Cloud segment, which includes server tools as well as Azure, reported revenue of $6.9 billion, up 8 percent from a year earlier.

Sales in the Productivity and Business Processes segment rose 10 percent, to $7.4 billion, as business sales of web-based Office 365 surged 47 percent from a year earlier.

Sales in the company's More Personal Computing segment fell 5 percent to $11.8 billion, a result of Microsoft's near-complete withdrawal from the mobile phone market as the company winds down units acquired from Nokia.

Outside of that drag, Microsoft's Windows business performed better than the lackluster computer market, buoyed by strength in the commercial PC market and solid sales of high-end devices, including Microsoft's own Surface Book and Dell's updated XPS line.

The quarter brought another major transformation at Microsoft in the $26.2 billion purchase of LinkedIn, sealed in December.

Microsoft's results include a few weeks of ownership of LinkedIn, during which the professional social-networking firm lost $100 million on sales of $228 million.

That dinged Microsoft's overall earnings by about 1 cent a share.

During LinkedIn's last full quarter as a publicly traded company, the three months ended in September, the company posted a profit of $9.1 million on sales of $959 million.

The addition of LinkedIn's 10,000 employees isn't the only structural change afoot.

On Monday, layoff notices went out to about 700 employees, the latest cuts in a set of 2,850 layoffs announced last year that the company said extended across regions and business units.

On the conference call, an analyst asked for the logic behind a reorganization set to shake up the company's sales teams.

Nadella said the company was pushing to get more technical expertise into its sales units, and change how those groups function. Customers, formerly ranked internally by how many copies of PC software a company bought, are increasingly measured by their use of Azure.

"That's the transformation that you'll increasingly see us push forward," Nadella said. "No status quo in any part of Microsoft's organization should be counted on."

© 2017 Seattle Times syndicated under contract with NewsEdge/Acquire Media. All rights reserved.

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