Microsoft Rides Cloud Strength to Post Sales Growth; Windows, Xbox Businesses See Strong Demand

Microsoft on Tuesday met analysts' quarterly sales expectations and beat profit estimates, but its shares fell slightly reflecting some skepticism about one-off benefits included in the results and high hopes after a year-long rally.

By grabbing market share in the booming market for cloud computing and expanding business services such as its Teams collaboration service and LinkedIn social network, the Redmond, Washington company has become one of the world's most valuable companies, worth close to $2 trillion (roughly Rs. 1,48,87,500 crores) after a 50 percent stock run-up over the past year.

Those services were still in demand during the pandemic, with Microsoft's Azure cloud service closing ground on market-share leader Amazon Web Services and growing 50 percent in the quarter. People working and studying from home bought new PCs and video consoles, spurring Microsoft Windows operating system and video game businesses.

Net income for the third quarter ended March 31 jumped 44 percent on a year ago to $15.5 billion (roughly Rs. 1,15,380 crores). Revenue and adjusted earnings per share were $41.7 billion (roughky Rs. 3,10,380 crores) and $1.95 (roughly Rs. 150) per share, above analysts' estimates of $41.03 billion (roughly Rs. 3,05,400 crores) and $1.78 (roughly Rs. 130) per share, according to data from Refinitiv.

Shares fell 2.5 percent, paring some deeper losses after executives gave a better-than-expected forecast during a conference call with investors.

"One-off tax and currency advantages have boosted Microsoft's third-quarter numbers, and as a result the market isn't being quite as welcoming of expectation-beating numbers as you might expect," said Nicholas Hyett, equity analyst at Hargreaves Lansdown. Net profit had included a favorable $620 million (roughly Rs. 4,610 crores) tax benefit from court rulings in India.

"That is the danger of trading on the kind of valuation Microsoft enjoys, 32.8 times next year's earnings. Disappoint even a little and the market will be unforgiving."

Sales for what Microsoft calls its "commercial cloud" - which contains server infrastructure such as Azure along with cloud-based versions of its Office software - was up 33 percent at $17.7 billion (roughly Rs. 1,31,730 crores). Sales for Dynamics 365 customer management, which competes directly with Salesforce, rose 45 percent and the business version of Office 365 added 15 percent more users.

"That's the fourth consecutive quarter of 15 percent seat growth on a very large base," Microsoft Chief Financial Officer Amy Hood said of the Office 365 results for commercial customers.

Microsoft has continued to double down on cloud-base software and said earlier this month it would buy artificial intelligence software firm Nuance Communications for $16 billion (roughly Rs. 1,19,090 crores), excluding net debt, to bolster its healthcare business.

Microsoft said Azure, its closely watched cloud computing business that competes with Amazon's Amazon Web Services and Alphabet's Google Cloud, grew 50 percent in the quarter, or 46 percent when adjusted for currency variations. This is down from a currency-adjusted 48 percent the quarter before but in line with analysts' expectations of 46.3 percent growth, according to data from Visible Alpha.

Overall sales at Microsoft's "intelligent cloud" unit that contains Azure were $15.1 billion (roughly Rs. 1,12,400 crores), above analysts' estimates of $14.92 (roughly Rs. 1,11,060 crores) billion, according to Refinitiv data.

Microsoft Teams has 145 million daily users, up from 115 million in October, Microsoft said. Sales for Microsoft's productivity software unit, which includes Office and Teams, were $13.6 billion (roughly Rs. 1,01,235 crores), compared with estimates of $13.49 billion (roughly Rs. 1,00,400 crores), according to Refinitiv.

Sales for its LinkedIn social network were up 23 percent on a currency adjusted basis, slightly above Visible Alpha estimates of 21.9 percent, as revenue continued to recover from a sharp decline in job listings and hiring at the onset of the pandemic.

Microsoft's personal computing unit, which contains its Windows operating system and Xbox gaming console, had $13 billion (roughly Rs. 96,750 crores) in sales, compared with analysts' expectations of $12.57 billion (roughly Rs. 93,510 crores), according to Refinitiv data. Sales of Windows to PC makers were up 10 percent, compared to a 1 percent rise the quarter earlier.

On a call with investors, Microsoft forecast fiscal fourth-quarter productivity segment revenue with a midpoint of $13.93 billion (roughly Rs. 1,03,630 crores), above Refinitiv estimates of $13.57 billion (roughly Rs. 1,00,950 crores). Its sales forecasts for its intelligent cloud and personal computing businesses had midpoints of $16.32 billion (roughly Rs. 1,21,405 crores) and $13.80 billion (roughly Rs. 1,02,660 crores), respectively, above estimates of $16.0 billion (roughly Rs. 1,19,030 crores) and $13.26 billion (roughly Rs. 98,640 crores), according to Refinitiv data.

© Thomson Reuters 2021