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Microsoft earnings hit by slow PC market, tax issues

The company said its commercial cloud, by contrast, is growing and is now at a $10 billion annual run rate.

Asa Mathat

Microsoft on Thursday posted revenue roughly in line with expectations, despite a weak global PC market. The company said it continues to see strength in its cloud business, which is now on a $10 billion annual run rate.

The company posted adjusted earnings of $5 billion, or 62 cents per share, on adjusted revenue of $22.1 billion. The software maker had been been expected to earn around 64 cents per share on revenue of just more than $22 billion, according to Thomson Financial. Higher-than-expected taxes lowered earnings by 4 cents per share, Microsoft said. Without that, the company said, it would have beaten expectations.

Foreign currency issues were also a factor, with Microsoft saying revenue was dented by approximately $838 million, or 4 percent, due to exchange rates.

Chipmaker Intel earlier this week said it sees the global PC market continuing to be sluggish for 2016, saying it expects a drop in the high single digits. Microsoft said its PC-based Windows revenue dropped 2 percent on a constant currency bases, better than the overall PC market, thanks to the strength of its premium versions of Windows.

Shares of Microsoft fell in after-hours trading, changing hands recently at $53.05, down $2.73, or nearly 5 percent.

While the Windows business was hit by slow PC sales, Microsoft continues to have success getting both businesses and consumers to buy Office as a subscription service. It now has 22 million consumer Office 365 subscribers, up from 12 million a year ago, while business subscriptions are up 57 percent year-over-year.

Revenue from its Surface line of PCs and tablets grew 61 percent year-over-year, adjusted for currency changes, while phone revenue was down 46 percent on a similar basis.

On the search front, Microsoft said more than a third of its searches in March came from the 270 million devices running Windows 10, while search revenue, excluding traffic acquisition costs, grew 18 percent in the quarter on a constant currency basis.

Update: Microsoft is just about to kick off its earnings conference call. The hold music has been a Prince tribute mix including “Purple Rain” and “Raspberry Beret.” His little-known B-side “Unearned Revenue” has not yet played.

Well, “1999” is now playing, but investor relations would like to caution that any notions that the company plans to “party like it’s 1999” represent forward-looking statements.

2:40 pm PT: Now, on to the less exciting part. The actual conference call.

“Overall we had a solid quarter,” CEO Satya Nadella said, noting the company is halfway to its goal of $20 billion in commercial cloud revenue by fiscal year 2018. The company also wants a billion devices running Windows 10, currently at 270 million.

2:43 pm: We noted the percentage changes in Surface and phone sales earlier, but in absolute revenue, Microsoft now makes more from its built-from-scratch laptop line than it does from the phone hardware business it spent like $7 billion to buy from Nokia.

3:07 pm: CFO Amy Hood says Microsoft sees cloud momentum continuing into the next fiscal year, which starts in July, driving revenue growth. Total operating expenses should be flat to up slightly. The company plans to share more in July.

The current quarter will be affected by PC weakness and some softness in transactional Office sales (as opposed to Office 365), leading to a revenue forecast below analyst estimates in several of the company’s business units.

On to Q and A.

3:15 pm: A brawl has broken out with both sides shouting obscenities. Sorry, that was in the Giants-Diamondbacks game. I’m multitasking.

3:25 pm: Giants still down 50 percent vs. their industry peer headed into back half of fiscal inning eight.

3:35 pm: Nadella says Internet-of-Things effort is still in the early innings, but big area of focus. (Giants game no longer in the early innings.)

And, that’s a wrap. For the Microsoft call, that is; Giants still have one more chance.

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