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Price Cuts for Crucial Microsoft Products Eroded Holiday-Season Profit

Satya Nadella, chief executive of Microsoft, at a promotional event at the company’s headquarters in Redmond, Wash., last week.Credit...Elaine Thompson/Associated Press

SEATTLE — Microsoft has conjured up some attention-grabbing new products lately to help it restart growth. The company’s results over the holidays show how badly it needs them to work.

The company said net income fell during the last three months of the year as Microsoft cut prices in its Windows and Xbox businesses. The moves helped blunt inroads by competitors, which could pay dividends down the line for Microsoft, but they are not helping the computing giant make more money in the near term.

“This quarter’s results show the product and business transformation underway at Microsoft,” Satya Nadella, the company’s chief executive, said in a conference call with analysts. 

Microsoft said it had net income of $5.86 billion, or 71 cents a share, during its fiscal second quarter, which ended Dec. 31, compared with net income of $6.56 billion, or 78 cents a share, a year ago.

Revenue for the period was $26.47 billion, up 8 percent from $24.52 billion a year ago. The overall figures were mostly as anticipated by Wall Street analysts, who had little expectation for a sudden surge in sales or profits. An average of analyst estimates compiled by Thomson Reuters called for earnings of 71 cents a share and revenue of $26.33 billion.

But some analysts were disappointed by the weakness in Microsoft’s Windows business. The revenue the company made by licensing copies of the Windows operating system to hardware partners, including makers of PCs and tablets, fell 13 percent during the quarter.

“It was largely in line with expectations, but I think PC sales sluggishness was probably a bit greater than expected,” said Josh Olson, an analyst at Edward Jones.

Microsoft’s shares fell more than 4 percent on the news in after-hours trading.

Last year, there was an uptick in Windows revenue because Microsoft ended its technical support for users of Windows XP, an old version of the operating system. The decision effectively forced many businesses to upgrade to PCs running newer copies of Windows. But now companies are largely done with that process and are spending less on new machines.

Microsoft is also making less because of a new pricing structure for Windows. The company cut prices on Windows for devices sold to academic customers and to consumers who buy the cheapest PCs available, which usually cost less than $250.

While competitors have struggled to dislodge Microsoft from the business PC market, they have had better luck chipping away in the education and consumer markets. Apple’s Mac and iPad tablets have both stolen share from Windows PCs, while cheap laptops called Chromebooks that run an operating system from Google are also chewing into low-end PC sales.

Last week, Microsoft started sharing more of its plans to restart the growth of its operating system business with a new product, Windows 10. It showed off imaginative new products that will run on the software, like HoloLens, a virtual- and augmented-reality headset.

But it has also modified the product to make it more palatable to customers than the previous version of the software, Windows 8, which aggressively pushed a new touch-friendly graphical interface.

Daniel Ives, an analyst at FBR Capital Markets, said Microsoft’s Windows results showed the importance of Windows 10, which is expected to be released later this year, to the company’s future. “Growth still remains an uphill battle, but it feels like this ship is moving in the right direction towards cloud and mobile under Nadella,” Mr. Ives said.

Microsoft’s revenue from its Xbox business also suffered from price cuts, enacted last year to help it gain share in the game console business. The company originally priced its Xbox One game console at $500, handing its main competitor, Sony, a huge price advantage that spurred sales. In response, Microsoft last year offered a $400 version of the Xbox One without the a motion-control sensor called Kinect, subsequently dropping the price of that product to $350.

The move helped the Xbox gain share in the American market, but Xbox revenue also dropped 20 percent, partly as a result of the lower prices.

There were also signs of progress in other areas of the company’s business. Microsoft has invested heavily in cloud computing as traditional software sales lose ground to online services that corporate customers rent instead. Microsoft said its commercial cloud revenue grew 114 percent in the quarter.

Meanwhile, the company’s Surface tablet, which stumbled badly when it was first released, appears to be turning into a decent business for Microsoft. Surface sales grew 24 percent to $1.1 billion in the quarter, breaking $1 billion for the first time.

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Price Cuts for Crucial Microsoft Products Eroded Holiday-Season Profit. Order Reprints | Today’s Paper | Subscribe

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