Microsoft sells record 10.5M Lumia phones in Q4, as it works to integrate Nokia

Microsoft (NASDAQ: MSFT) sold a record 10.5 million Lumia-branded Windows Phones in the fourth quarter, but is still dealing with the hangover of integrating Nokia's devices and services business.

Overall, Microsoft said its profit in the quarter was $5.86 billion, down from $6.56 billion a year ago. The company said total sales were $26.47 billion, up 8 percent from $24.52 billion in the year-ago period and slightly ahead of analysts' estimates, according to Bloomberg.

Microsoft's results for the quarter include $243 million in integration and restructuring expenses, related to both Microsoft's 18,000 job cuts that were announced in July 2014 and the ongoing integration of the Nokia business (12,500 of those jobs were former Nokia employees). 

Microsoft reported phone hardware revenue of $2.3 billion in the quarter.

On the company's earnings conference call, Microsoft CEO Satya Nadella said that Microsoft's phone business saw strength in devices such as Lumia 500 and 600 series, the company's entry-level category. "In this segment of the market, the combination of our brand and value standout and we plan to continue to build a beachhead here," he said.

Microsoft CFO Amy Hood said that the company is executing on its phone strategy that it articulated in July, with the plan being to use the Lumia portfolio of phones to increase sales volumes in the low-end smartphone segment. That mirrors Microsoft's larger Windows Phone strategy, which has been based around lowering the bill of materials through chipset reference designs via Qualcomm (NASDAQ:QCOM), and enticing OEM partners to create affordable phones by eliminating software licensing fees for the devices.

Hood noted Microsoft sold more than 39 million non-Lumia phones "even while we make changes to the product portfolio and manage this business for profitability. We are looking forward to bringing new products to market that will showcase the features that we presented at our Windows 10 event last week."

Hood added that in terms of the Nokia integration and restructuring, Microsoft has "been focused on optimizing resources across the company which includes reducing the expense base in our phone business. To date, we have integrated the manufacturing and supply chain teams across Microsoft while also rationalizing our phone manufacturing capacity."

Microsoft has cut $1 billion from the phone unit's cost structure and continues "to look for opportunities to drive further efficiencies," Hood said.

Looking ahead to the next quarter, Microsoft said it expects phone hardware revenue to be $1.4 billion to $1.5 billion and "accelerating year-over-year growth in Lumia units driven by our affordable smartphone devices." The company also expects sales volumes and average selling prices of non-Lumia phones to drop next quarter.

With Windows 10, Microsoft is creating a unified operating system that will let developers write universal apps for multiple device sizes, in a bid to jumpstart Microsoft's weak market position in mobile.

Regarding Windows 10 phones, Nadella said earlier this month that "we absolutely are committed to bringing a great line of hardware." He added: "You can be assured that we will do some fantastic work from the flagship phones to the affordable smartphones, and have a full lineup of phones that will be available with Windows 10."

For more:
- see this release
- see this Seeking Alpha transcript
- see this The Verge article
- see this Re/code article
- see this CNET article

Special Report: Wireless in the fourth quarter of 2014

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