Microsoft’s (MSFT) $7 billion acquisition of Nokia’s mobile phone business in April cost the company nearly $700 million in operating profit in the quarter, the company said on today.

Microsoft was hoping the Nokia purchase would allow it to sell more Windows smartphones and use them to lure customers to its software, Internet services and mobile apps. That appears to be a work in progress.

Overall, Microsoft’s total revenue was up 18% in its fourth quarter. Sales of Windows, Office, database and other products to companies rose 10.5%, a faster rate than in prior quarters. Microsoft also generated more profit out of those sales than it had in earlier periods.

It appears that Microsoft’s new way of selling software is working, as it shifts to more Web-friendly software such as Office 365, an online version of its workplace document-and-spreadsheet software.

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.

Revenue from server-software licenses rose 14% in the fourth quarter.

In a conference call with analysts, chief executive Satya Nadella offered details on how he expected to invest money in the “core” areas such as the Windows operating system and its software to help businesses and consumers live and work more efficiently.

He emphasized keeping costs under control, in part by eliminating duplicative projects. As such, Nadella said Microsoft would merge three versions of its Windows software for smartphones, tablets and PCs into a single operating system.

Microsoft also said Nokia will continue to be a drag on profits, before job cuts and other cost-cutting efforts make Nokia break even by Microsoft year ending June 2016.

Net income for its fiscal fourth quarter ended June 30 fell 7.1% to $4.6 billion, or $0.55 a share, from $5 billion, or $0.59 cents a share, a year earlier. Losses at Nokia cut $0.08 per share from earnings. Microsoft lost another net $0.03 per share on restructuring and tax-related items. Excluding those items, earnings hit $0.66 per share. Analysts polled by I/B/E/S were expecting earnings of $0.604 per share for the fourth quarter. Revenues rose to $23.4 billion from $19.9 billion.

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Wayne Thorp
ABOUT THE AUTHOR:

Wayne A. Thorp, CFA, is editor of Computerized Investing and a vice president and the senior financial analyst at The American Association of Individual Investors (AAII). He is also the program manager for AAII's Stock Investor Pro fundamental stock screening and research database program and is on the advisory boards of AAII's Stock Superstars Report and Dividend Investing newsletters. He holds the Chartered Financial Analyst (CFA) designation and is a 1997 honors graduate of DePaul University in Chicago. Wayne's interests include stock screening, technical analysis and charting, social media and tech gadgets. However, in the summer he'd prefer to be hip-deep in northern Michigan's Manistee River fly-fishing for rainbow trout.

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