Microsoft profits fall by 10%

Microsoft’s results also revealed that $1.4bn has been spent on restructuring the business in the last six months

The Seattle-based technology company beat Wall Street’s expectations with revenue of $25.6 billion in the quarter but profit fell to $5.86 billion, compared to $6.5 billion in the same period a year earlier (AFP/Getty )

A tax crackdown, falling sales of its flagship software Windows and a costly restructure saw Microsoft’s profit fall by 10 per cent in the three months to December.

The Seattle-based technology company beat Wall Street’s expectations with revenue of $25.6 billion in the quarter but profit fell to $5.86 billion, compared to $6.5 billion in the same period a year earlier.

Microsoft took a $232 million tax hit due to an "audit adjustment" by the US's Internal Revenue Service. The charge relates to a long-running dispute with the IRS over Microsoft’s accounting policies with its overseas subsidiaries in lower taxed areas such as Ireland, Singapore and Puerto Rico. The IRS crackdown saw Microsoft’s tax rate rise from 17 per cent a year ago to 25 per cent.

Microsoft warned shareholders that its tax burden may also increase in the future, saying: "Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favourably more difficult."

In November China charged the company $140 million amid accusations of tax evasion, while in the UK the Government has pledged a 'Google tax' to crackdown on the practice among tech companies of processing sales overseas.

Microsoft’s results also revealed that $1.4 billion has been spent on restructuring the business in the last six months. Chief executive Satya Nadella has piloted an overhaul since taking control last February in a bid to modernise the company. Microsoft has also been dealing with the integration of Nokia’s phone-making business, which it acquired for $7.2 billion last April.

Perhaps most worryingly for investors, revenue from the company’s flagship Windows software fell 13 per cent in the quarter. Nadella said: "We are taking bold steps forward across our business, and specifically with Windows 10, to deliver new experiences, new categories, and new opportunities to our customers."

Richard Windsor, analyst at Edison Investment Research, said: "The problem is that the new emerging business that are growing well like Azure, Surface, Office 365, Xbox and so on are still too small to offset the impact of weakness in the PC market."

Shares in Microsoft fell over 4 per cent in pre-market trade.