The Redmond, Washington-based software giant posted a net loss of $3.20 billion, its largest loss ever, according to news reports. The 40-cent-per-share loss reversed a profit of $4.61 billion, or 55 cents per share, a year ago.
Adjusted to exclude the charges, the company posted a quarterly profit of 62 cents per share, beating the average estimate of 15 analysts surveyed by Zacks Investment Research of 31 cents per share.
The write-down was expected after CEO Satya Nadella announced 7,800 job cuts two weeks ago. The company will continue to make phones on a smaller scale, paring down its lower-cost offerings.
Nadella told analysts on a conference call he'd like Windows phones to be more targeted at high-end businesses and their employees, much like its Surface tablet, which saw upbeat sales.
"We have a formula there that I would like to apply more broadly," Nadella said.
The difficult quarter comes ahead of the launch of Windows 10 on July 29, a free upgrade for users of Windows 7 or 8 for the next year. The company hopes that better integrating its store into the revamped Start button and powering more Internet searches through Bing will compensate for the temporary dip in Windows revenue.
Microsoft plans for Windows 10 to be its last version of Windows before transitioning the business to a fee-for-service model down the road, although how that will work is unclear.
The company gave an outlook for revenue of $20.7 billion to $21.3 billion for the first fiscal quarter through September that was below the $22.6 billion expected by analysts polled by FactSet.
Shares dipped $1.90, or 4 per cent, to $45.38 in after-hours trading.
Daniel Ives, senior analyst with FBR Capital Markets, said the company is likely under-promising in the hope it can over-deliver, but investors are cautious about the launch of Windows 10.
"The Street continues to be wary of what Windows 10 can bring in terms of a growth profile back to the Microsoft story," Ives said. "It's a transitional quarter going into a transitional year."
In the quarter through June, Windows revenue fell 22 per cent, hurt by a decline in PC shipments that researchers at IDC pegged at 11.8 per cent globally. The decline was exacerbated by a temporary bump last year when Microsoft ended support for Windows XP, which resulted in a one-time boost to Windows 7 sales.
Offsetting some of the decline was its booming cloud computing business and positive contributions from Xbox, Surface tablets and Bing search ads, which gained more than a percentage point for a U.S. market share of 20.3 per cent. Phone hardware sales were worse than expected.
Overall revenue fell 5 per cent to $22.18 billion, slightly higher than the $21.98 billion expected by analysts surveyed by Zacks.
Elements of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on MSFT at http://www.zacks.com/ap/MSFT
Keywords: Microsoft, Earnings Report, Priority Earnings
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