Not surprising all the legacy providers are taking hits as corporations don't like the audits that are being handed out. Aivars Lode avantce

Microsoft's Profit Takes Hit on Nokia

Software Giant's Revenue Increases, Beating Estimates

An initial report card came in for Microsoft Corp.'s purchase of NokiaCorp.'s mobile phone business. As feared, the marks were poor.

Nokia's former handset operation, which Microsoft bought for more than $7 billion in April, drained nearly $700 million from operating profit in the quarter, the company said on Tuesday.

Cost-cutting to offset Nokia losses also represented the lion's share of 18,000 job cuts ordered last week by new Chief Executive Satya Nadella, the biggest workforce reduction in its history.

The Nokia purchase could look smart in the long run if Microsoft is able to sell more of its smartphones and use them to lure customers to its software, Internet services and mobile apps. Initially, at least, that appears more hope than reality.

The company has been changing how it sells software to companies to pitch more of its Web-friendly software such as Office 365, an online version of its ubiquitous workplace document-and-spreadsheet software.Microsoft's other businesses are doing well, with total revenue up 18% in its fourth quarter. Sales of Windows, Office, database and other products to companies rose 10.5%, a faster clip than in prior quarters. Microsoft also generated more profit out of those sales than it had in earlier periods.

"We're feeling quite proud of the aggressive move we've made here," Amy Hood, Microsoft's chief financial officer, said in an interview.

Microsoft stock rose 1% in after-hours trading to $45.33 following the earnings report.

Mr. Nadella has touted his vision for Microsoft as a "mobile-first, cloud-first" company. So far, the company has had much more success on the second part of that mission statement.

Even with the Nokia purchase, Microsoft sells fewer than 5% of all new smartphones purchased world-wide. The company said Thursday that it sold about 5.8 million Nokia smartphones since it acquired Nokia's handset business in April. By comparison, rival AppleInc. sold 35.2 million iPhones in the three months ended June 28.

The cloud-related businesses are faring much better. Microsoft said Office 365 sales more than doubled in the quarter. Total cloud revenue, which includes its Azure computing service, is on pace to generate $4.4 billion in annual revenue.

Microsoft also is posting heady growth in older products like its database software, called SQL Server, and the Windows operating software for computer servers. Microsoft's revenue from server-software licenses rose 14% in the fourth quarter.

Mr. Nadella, on a conference call with analysts, sketched out how he expected to invest money in the "core" areas like the Windows operating system and its software to help businesses and consumers live and work more efficiently.The company also highlighted strong sales of the software to small-and-medium-sized businesses. Those smaller companies aren't historically Microsoft's best customers.

He pledged to keep a lid on costs, in part by stopping work on duplicative projects. As an example, Mr. Nadella said Microsoft would merge three versions of its Windows software for smartphones, tablets and PCs into a single operating system. Mr. Nadella also said Microsoft will "run all businesses in an economically sound way."

Net income for its fiscal fourth quarter ended June 30 fell 7.1% to $4.6 billion, or 55 cents a share, from $5 billion, or 59 cents a share, a year earlier. Revenues rose to $23.4 billion from $19.9 billion.Those words should please investors, many of whom have said Microsoft spends money too freely on too many things. Microsoft also said Nokia will continue to be a drain on profits, before job cuts and other cost-cutting efforts make Nokia break even by Microsoft year ending June 2016.