Profit excluding certain costs in the second quarter was US77c a share.
Revenue rose 8 per cent to US$26.5 billion ($35.6 billion), Microsoft said. Analysts on average projected profit of US75c on sales of US$26.3 billion, showed Bloomberg-compiled data.
Including charges linked to the giant's biggest-ever round of job cuts, which began in July, and US4c a share of income-tax expense, Microsoft reported second-quarter net income of US$5.86 billion, or US71c a share.
Many analysts slashed price targets on the stock and some cut their buy ratings to hold.
What are Wall St's main concerns?
Microsoft showed promising signs of growth in new businesses, such as cloud computing, but chief financial officer Amy Hood forecast revenue for the current period that missed analysts' expectations. Revenue for the quarter to March will be US$21 billion if Microsoft hits the midpoint of its own forecast. Analysts had forecast US$23.8 billion, on average.
"The cloud transition remains on track, but lower numbers means a lower price target," said analyst Ross MacMillan of RBC Capital Markets.
XP upgrades are over
Last year Microsoft stopped supporting its Windows XP software. That drove many consumers and businesses to upgrade their computers, giving a big boost to sales of newer Windows software. It seems that "end-of-XP" jolt is over. Microsoft said Windows licensing revenue fell 13 per cent in the December quarter, now that most businesses have finished replacing their old XP computers.
China and Japan markets are weak
PC sales have been slumping worldwide, but Microsoft said Windows and Office revenue in China and Japan markets was particularly weak due to broader economic issues in those countries. Chief executive Satya Nadella wasn't specific on what was ailing Chinese demand, citing "geopolitical issues". To analysts, that's code for the Chinese antitrust investigation of Microsoft and the country's government avoiding Microsoft software buys. China aims to purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020, sources said last month. In July, Chinese regulators raided Microsoft offices there.
Strong dollar
Microsoft said the strong dollar will trim revenue by 4 per cent in the current quarter.
Transition far from over
In less than a year, Nadella has made strides in expanding Microsoft's focus from PCs to the growing variety of gadgets people use to go online. The quarter showed major gains in sales of cloud-computing software, Surface tablets and Lumia smartphones. But yesterday's stock slump shows investors' honeymoon with Nadella may be over.
"He is a very skilled executive," Cowen analyst Gregg Moskowitz said, but questioned if Nadella could effect enough positive change over time.
Microsoft shares closed down 9.2 per cent at US$42.66 yesterday. The stock rose for much of 2014, peaking at US$50.05, but has slipped since the start of the year.