Microsoft Profits Eaten Away By Nokia

Microsoft Corporation (NASDAQ:MSFT) is laying off 18,000 staff, and most of them are coming from the company’s relatively recent acquisition, the Nokia devices business. Looking at the earnings report the company released yesterday, it’s not hard to see why the firm needs to get rid of that staff. Nokia isn’t exactly selling a huge amount of smartphones, and the company’s costs are eating away at Microsoft’s profit. All the while Satya Nadella, the Microsoft CEO, is wondering what drove Steve Ballmer and the board to make such an acquisition in the first place.

According to an earnings report released on Tuesday afternoon, Microsoft is doing well apart from its Nokia exposure. The company showed better-than-expected growth in revenue in the three months through June, with the accounts showing revenue of $23.38 billion, ahead of analysts’ expectations of $23 billion. Profit, however, was the company’s weak point with a total of 55 cents profit attributable to each common share, well behind the analyst expectations of profit of 61 cents per share.

Microsoft Loses On Nokia Pressure

The Nokia division at Microsoft brought in a respectable $2 billion in revenue during the company’s fourth quarter, but it wasn’t the revenue figures that disappointed. While making those sales, the division cost more than it earned. According to the company’s earnings release, Nokia lost Microsoft 8 cents per share in the fourth quarter, a substantial amount of money.

Microsoft closed the acquisition of the Nokia devices division on April 25 of this year. The acquisition cost the company $7.2 billion, though it’s not clear what Microsoft really wants the business for. The loss is likely a sore one, particularly as it detracts from what Microsoft is doing right.

Microsoft Designs For Business

The future of Microsoft is in enterprise, at least according to the company’s current CEO. That means much more concentration on the logistical and technical software it provides to businesses around the world. At the same time, the company is expected to concentrate less on consumer brands like the Xbox and stay away from certain parts of the tablet business. Given these trends, there is no real niche that Nokia seems able to fall into at the company.

The Nokia devices division could act in the same way as the Surface division theoretically should, giving businesses default devices to use with their shiny new Microsoft cloud platforms. Given that those platforms are still a ways off, Microsoft could spend a long time paying Nokia to stay around just in case. The company has been losing huge amounts of money on hardware for years, and, assuming it’s not about to spin off a division, that’s likely to continue for some time.

Microsoft is trying to appear as a company that’s there for businesses, but its strategy is still a little opaque. As it tones down the losses from the Nokia division, and develops its business solutions more wholly, it’s hoped that growth takes hold at the company in a constrained way. For now, however, investors are going to have to hold on and hope the company can figure out why it owns Nokia.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted