Microsoft Misses Wall Street's Q3 Targets Due To Sluggish Windows Sales, Profit Declines In Some Units

Microsoft said Thursday that it missed Wall Street's earnings forecast for its fiscal third quarter, due to sluggish Windows sales as well as profit declines in units that are home to its Azure and Office 365 businesses.

For the quarter ended March 31, Microsoft's net income dropped 25 percent year over year, to $3.76 billion, or 47 cents per share, while revenue fell more than 5 percent, to $20.5 billion. Excluding items, Microsoft reported revenue of $22.1 billion and 62 cents per share. Wall Street analysts had forecast $22.09 billion and 64 cents per share.

These figures, combined with fiscal fourth quarter guidance that also fell short of Wall Street's expectations, caused Microsoft shares to fall more than 5 percent, to $52.83, in after-hours trading. Going into earnings, Microsoft shares had been trading near a 52-week high of $56.85.

Microsoft said Azure cloud saw revenue grow of 120 percent in constant currency compared with last year, driven by strong sales of Azure compute and SQL database services.

[Related: Microsoft Upgrades FastTrack To Help Partners Accelerate Cloud Adoption]

"With our results this quarter, it's clear that we are one of the two leaders in this market," Microsoft CEO Satya Nadella said on the vendor's earnings call, referring to his company's competition with Amazon Web Services in the public cloud.

However, Microsoft said its Intelligent Cloud segment, of which the Azure business is a part, saw operating income drop 14 percent compared with last year's quarter.

Microsoft's Productivity and Business Processes unit, which is home to Office 365, saw operating profit drop 6.6 percent year over year during the quarter. There were bright spots, as Office 365 sales to businesses grew 63 percent in constant currency during the quarter, and Microsoft said it now has more than 22.2 million Office 365 consumer customers.

Microsoft CFO Amy Hood said the vendor has been stepping up its investments in data centers and cloud, with $2.3 billion in capital expenditure during the quarter, up 65 percent year over year.

The Redmond, Wash.-based software giant's More Personal Computing unit -- home to Windows, Surface and Windows Phone -- saw operating profit jump 57 percent during the quarter. Sales of Windows dropped 7 percent during the quarter to $292 million, as sales to businesses fell 11 percent compared with last year. Windows sales to consumers grew 15 percent year over year during the quarter.

Windows Phone sales plummeted 46 percent compared with last year's quarter, On the plus side, Surface revenue grew 61 percent year over year, to $1.1 billion.