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Originally published January 26, 2015 at 1:32 PM | Page modified February 4, 2015 at 11:02 AM

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Business shift to cloud services hits traditional Microsoft cash cows

Charges related to the 18,000 layoffs Microsoft announced in July and an income tax charge as a result of an Internal Revenue Service audit lowered the company’s profit by a combined 6 cents a share, the company said Monday.

Seattle Times technology reporter


Microsoft ended 2014 on a mixed note, reporting a slide in quarterly earnings as growth in the company’s business sales slowed.

The Redmond company Monday reported a profit of 71 cents a share during the three months ended Dec. 31, below the 78 cents a share earned in the same period a year earlier.

The results met the expectations of financial analysts surveyed by Bloomberg.

The quarter brought more growth in the use of Microsoft’s Web-based software and services. Revenue from sales of Microsoft’s cloud-computing products to businesses grew 114 percent from a year earlier to a pace that would bring in $5.5 billion on an annual basis.

The furious growth of that unit was a big piece of why Microsoft met or exceeded Wall Street expectations in much of the last year, even as other big, business-focused technology companies stumbled.

But Microsoft’s parade of good news stalled a bit amid signs that the shift to the cloud was taking a bite out of one of the company’s cash cows.

Revenue from Microsoft’s commercial-licensing segment, the seller of Windows, Office and server products to business customers and the company’s largest reporting unit, fell 2 percent and came in below the company’s target. The decline was primarily the result of a 13 percent drop in sales of licenses of Microsoft’s Office productivity suite, the company said.

“That could spook some investors,” said Daniel Ives, an analyst with FBR Capital Markets. The worry, Ives said, is the rising portion of sales of subscription-based versions of Microsoft’s software will shrink the company’s profit in the short term.

Sales at Microsoft’s two business-focused segments together grew 5 percent, down from the near-double-digit growth logged in the previous two quarters.

One-time charges also took a toll on Microsoft’s profitability.

Costs related to the 18,000 layoffs announced in July and an income-tax charge as a result of an Internal Revenue Service audit lowered the company’s profit by a combined 6 cents a share, the company said.

A surge in the value of the U.S. dollar limited the profit Microsoft earned on goods sold abroad in other currencies, reducing Microsoft’s profit by 1 cent a share.

Apart from the foreign-exchange impact, Microsoft’s units in Japan and China struggled during the quarter, executives told analysts on a conference call Monday.

Revenue during the last three months of 2014 was $26.5 billion, the company said, higher than expectations for $26.3 billion. Net income was $5.8 billion, down 11 percent from the same quarter a year earlier.

The revenue figure was a record for Microsoft, boosted by inclusion of the Nokia unit the company didn’t own a year ago and a seasonal holiday sales gain.

Microsoft closed its $7.5 billion purchase of Nokia’s money-losing handset unit in April. Three months later, new CEO Satya Nadella announced the largest layoffs in company history to bring the business to profitability and streamline other units.

That restructuring is winding down. Microsoft said Monday that by the end of 2014 it had notified 17,500 impacted employees, and accounted for essentially all the related severance and other charges regarding those layoffs.

Hood said the company expected integration costs of $100 million in each of the next two quarters.

Microsoft “is making a very difficult transition, and navigating it, I would say, very smoothly,” said Merv Adrian, an analyst with researcher Gartner. “Those are big changes for a company of this size. It’s easy to stumble.”

As a result of the income-tax charge recorded in the quarter, Microsoft paid the equivalent of a 25 percent tax rate in the quarter, above the 21 percent paid in Microsoft’s most recent fiscal year.

Microsoft’s tax rate is lower than the 35 percent rate levied on U.S. corporations because of the company’s use of sales offices in Singapore, Ireland and Puerto Rico.

The IRS for years has been investigating Microsoft’s use of offices abroad, part of the tax regulator’s push to ensure companies pay proper taxes on goods and intellectual property shipped between business units.

Microsoft shares closed down 0.4 percent at $47.01 on Monday, and slid 4.3 percent in after-hours trading.

Through Monday’s close, the stock had gained 28 percent in the last year as investors cheered Microsoft’s rounds of cost-cutting and generally higher-than-expected profits during Nadella’s first year at the helm.

Matt Day: 206-464-2420 or On twitter: @mattmday

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