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Microsoft shares fall as Nokia, Windows ding profits

SAN MATEO, Calif. — Microsoft shares fell Monday after the software juggernaut reported its Nokia and Windows businesses undercut profits.

The company rang up $26.5 billion in second-quarter revenue, compared with $24.5 billion a year ago.

Earnings for the period, which ended Dec. 31, were in line with analyst estimates of 71 cents a share, compared with 78 cents last year. The bottom-line was dragged by costs related to job cuts and the $7 billion acquisition last year of Nokia's mobile-phone business.

Shares of Microsoft MSFT lost 4%, to $45.01, in extended trading Monday. The Redmond, Wash., company released its second-quarter results after the close of markets.

Microsoft's results kicked off a busy week for tech earnings, which pick up with reports from Apple and Yahoo on Tuesday, Facebook on Wednesday, and Amazon.com, Google and Alibaba on Thursday. EBay got the industry off to a stumbling start last week, when it announced 2,400 layoffs and plans to spin off its enterprise unit.

The second-quarter results held some encouraging signs for Microsoft's transition from a software behemoth to a cloud-based business reliant on devices and value-added services.

But there were some weak spots beyond Nokia. Computing and gaming hardware sales fell 11% because of Xbox platform sales, while commercial licensing revenue — which includes its Windows business — fell 2%.

As Microsoft enters its 40th year of existence, its middle-age persona is increasingly keen to major changes in computing — including Big Data, mobility and the cloud — while reducing its dependence on PCs. Microsoft's decision to give away Windows 10 system as a free upgrade to many current users is risky but could pay off if it leads to more adoption of cloud-based subscriptions such as those for its popular Office suite, according to analysts.

"There is a willingness to go after partnerships with Salesforce.com, Oracle and IBM and build the (Microsoft) platform," says R "Ray" Wang, principal analyst at Constellation Research.

At the same time, Microsoft has made forays into mobile hardware, with two new inexpensive variants of Smartphone targeted at emerging markets, and the launch of the high-end Surface Pro 3 tablet. Surface sales topped $1 billion in the quarter.

Just as important, CEO Satya Nadella has burnished the company's image in his first year in charge. Last week, Microsoft wowed reporters and analysts with a holographic headset during the introduction of the newfangled Windows 10 operating system. It also continues to invest in its gaming unit.

The renaissance in Redmond is reflected in Microsoft shares, which sell for 16 times forward earnings today compared with nine times two years ago.