Microsoft’s cloud growth drives quarterly sales and earnings

Microsoft reported quarterly sales and earnings that beat analysts’ forecasts, driven by robust growth in demand for cloud services.

Revenue for the third quarter ended March 31 rose 18% to $49.4 billion, the Redmond, Washington-based software maker said in a statement Tuesday. Net income increased to $16.7 billion, or $2.22 per share. This compares to average analyst forecasts of $49 billion in revenue and $2.19 per share of earnings, according to a Bloomberg survey.

CEO Satya Nadella has built the company’s two main cloud businesses, Azure and web-based versions of Office, into steady engines of growth that help protect Microsoft from supply chain weaknesses that affect the availability of PCs and Xbox consoles. Azure — behind only Amazon.com Inc. in the market for cloud infrastructure services, compute, and storage delivered over the internet — posted 46% growth, in line with the second-quarter rate and in-line with estimates.

“Investors expected us to get back on a growth trend for Azure, as opposed to the slowdown we had in the second quarter,” said Dan Morgan, a senior portfolio manager at Synovus Trust, which owns Microsoft.

Microsoft shares alternated between gains and losses in extended trading after the report, after falling 3.7% to $270.22 at the close in New York. While the stock is up 51% in 2021, it’s down 20% so far this year amid a plummet in big tech stocks.

Chief Financial Officer Amy Hood said Xbox hardware sales, which rose 14%, exceeded her expectations as Microsoft was able to get more console accessories into stores. Revenue from Xbox content and services has increased by 4% recently.

Hood said Azure’s currency-neutral growth rate was also higher than she had forecast at 49%. The company saw strong commercial bookings, a measure of future revenue, with multi-year contracts for use of Office 365, Microsoft 365 and Azure driving growth. The contract renewals demonstrate satisfaction with Microsoft’s cloud products, she said. “There’s nothing quite like that moment when you ask people to pay you again and re-commit, to know they’re receiving great value,” she said in an interview.

Total cloud revenue increased 32% to $23.4 billion. Gross margin, the percentage of revenue remaining after deducting production costs, has narrowed “slightly” to 70% in the cloud business, the company said in an earnings presentation on its website. Without an accounting change, the margin would have widened by 3%.

The software giant’s financial report comes two days ahead of cloud rival Amazon, while Google, which is trying to catch up with Microsoft, is also reporting earnings today. International Business Machines last week reported sales that beat analyst estimates on the strength of its hybrid cloud offerings, indicating healthy business software demand that should also boost Microsoft, Morgan said.

Sales of Office 365 to business customers increased 17%, and revenue from software for Windows operating systems sold to PC makers increased 11%.

In the productivity and business processes unit, revenue rose 17% to $15.8 billion, in line with forecasts. Revenue from LinkedIn, which is included in this division, rose 34% year over year. Intelligent cloud unit sales increased 26% to $19.1 billion, beating forecast of $18.9 billion. The More Personal Computing division reported revenue up 11% to $14.5 billion, also beating estimates.

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