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Microsoft Q1 profit falls 13 percent, weighed down by Nokia unit

In its second quarter after acquiring Nokia, Microsoft is paying the price for layoffs even as its other divisions continue to grow.

Microsoft CEO Satya Nadella. Seth Rosenblatt/CNET

Microsoft is still very much a company in transition. While it continues to incur losses in an attempt to succeed in the mobile device market, Microsoft's cloud services, software and Surface tablet divisions continue to grow.

Microsoft on Thursday posted fiscal first-quarter earnings, reporting 54 cents a share, down 13 percent from 62 cents per share a year ago. Sales rose to $23.2 billion, up 25 percent from the same time last year.

Central to the company's performance this quarter is handset maker Nokia, which Microsoft acquired in April for more than $7.2 billion. The phone hardware division has grown since Microsoft brought Nokia's Lumia line of smartphones into the fold, and Microsoft hopes it will help boost the popularity of Windows products and services across the board. But the acquisition has come with costly layoffs and high operating costs.

Nokia helped the smartphone division notch better than expected revenue this quarter at $2.6 billion in sales, but it cost the company $1.14 billion in severance packages and other restructuring costs and sustained its drag on profit. Microsoft expects an additional $500 million in restructuring costs, which will bring the total charges in line with projections Microsoft laid out in July. The good news: Microsoft reported that it sold 9.3 million Lumia phones in the quarter, up 5.6 percent from the record 8.3 million devices sold this time last year.

A bright spot this quarter was Surface tablet sales. Until today, Microsoft had not bundled sales of its new Surface Pro 3, released in June, in the division's overall performance. With the new tablet included, Surface sales rose to $908 million, up 127 percent from the same time last year. Microsoft decided last quarter not to ship the Surface Mini, a smaller 7-inch device, but that appears not to have negatively impacted the division's strength as Surface Pro 3 sales grow.

Many of Microsoft's other divisions, including servers, software, computers and video games continue to do well. The best performer of the group was the cloud division, which more than doubled its sales. The loser of the group is its Windows business for new computers, which declined 1 percent, though it was still better than the 7 percent decline over the same period last year.

"Microsoft is executing well, and seems to be navigating the transition to having a hardware business without a hiccup," Merv Adrian, an analyst and research vice president at Gartner, told CNET, "even given the sizable realignment including the layoffs."

Microsoft stock is up 4.3 percent in after-hours trading. It's risen 20 percent so far this year.

Microsoft is one of the tech industry's most established companies, yet it's currently undergoing significant change as it seeks to address the fast-moving landscapes both in consumer electronics like phones, tablets and PCs as well as its bread-and-butter business of selling machines, software and services to large businesses.

CEO Satya Nadella, who took the reins of the company from Steve Ballmer in February, has shifted the company's focus to mobile devices and the Internet services that power them. At the same time, he has resisted calls to pull resources away from consumer-facing divisions of the company, instead publicly committing Microsoft to its Surface line of tablets, Windows Phone mobile devices and Xbox video game console.

The changes at Redmond have not come without compromises. Microsoft announced in June that it would be laying off 18,000 employees -- the largest workforce reduction in its history, representing around 14 percent of its 125,000 worldwide employees -- in an effort to offset losses after the Nokia acquisition. Many of the Microsoft members receiving pink slips in the ongoing series of layoffs are former Nokia employees.

Nadella is confident, however, with the results of the quarter and the direction of his now oft-repeated "mobile-first, cloud-first" vision.

"We will continue to drive the changes that will position us to the future," Nadella said on a conference call Thursday. "We'll be accountable to our customers, partners and shareholders and relentless in our pursuit of areas of longterm growth."