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Apr 26, 2022

Microsoft cloud growth propels higher quarterly sales, earnings

David Fingold discusses Microsoft

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Microsoft Corp. reported quarterly sales and earnings that topped analysts’ projections, fueled by robust growth in cloud-services demand.

Revenue in the third quarter, which ended March 31, rose 18 per cent to US$49.4 billion, the Redmond, Washington-based software maker said Tuesday in a statement. Net income rose to US$16.7 billion, or US$2.22 a share. That compared with average analyst projections for US$49 billion in sales and US$2.19 a share in earnings, according to a Bloomberg survey.

Chief Executive Officer Satya Nadella has built up the company’s two main cloud businesses, Azure and internet-based versions of Office, into steady growth engines that help insulate Microsoft from supply-chain weakness that hurt the availability of PCs and Xbox consoles. Azure -- behind only Amazon.com Inc. in the market for cloud infrastructure services, computing power and storage delivered via the internet -- posted 46 per cent growth, matching the rate in the second quarter and meeting estimates.

“Investors were banking we’d get back on a growth trajectory trend for Azure, as opposed to the deceleration we had in the second quarter,” said Dan Morgan, a senior portfolio manager at Synovus Trust Co., which owns shares of Microsoft.

Microsoft shares alternated between gains and losses in extended trading following the report, after declining 3.7 per cent to US$270.22 at the close in New York. While the stock jumped 51 per cent in 2021, it has fallen 20 per cent so far this year amid a rout in large technology stocks.

Chief Financial Officer Amy Hood said Xbox hardware revenue, which rose 14 per cent, came in ahead of her expectations, as Microsoft has been able to get more console supplies into stores. Revenue from Xbox content and services climbed 4 per cent in the recent period.

Hood said Azure’s 49 per cent growth rate in constant currency terms was also higher than she had projected. The company saw strength in commercial bookings, a measure of future revenue, with multiyear deals for Office 365, Microsoft 365 and Azure use fueling growth. The contract renewals illustrate satisfaction with Microsoft’s cloud products, she said. “There’s nothing like the moment where you ask people to pay you again and commit again to know that they’re getting great value,” she said in an interview.

Overall cloud revenue rose 32 per cent to US$23.4 billion. Gross margin, the percentage of sales left after subtracting production costs, narrowed “slightly” to 70 per cent in the cloud business, the company said in an earnings slide presentation on its website. Excluding an accounting change, margin would have widened by 3 per cent.

The software giant’s financial report comes two days ahead of cloud rival Amazon, while Google, which is trying to catch Microsoft, also reports earning today. International Business Machines Corp. last week reported sales that topped analysts’ estimates on the strength of its hybrid-cloud offerings, indicating healthy demand for corporate software that should boost Microsoft as well, Morgan said.

Sales of Office 365 to business customers rose 17 per cent, and revenue from Windows operating-system software sold to PC makers rose 11 per cent. 

In the Productivity and Business Processes unit, sales jumped 17 per cent to US$15.8 billion, in line with forecasts. Revenue from LinkedIn, which is included in that division, increased 34 per cent from a year earlier. Intelligent Cloud unit sales rose 26 per cent to US$19.1 billion, exceeding projections for US$18.9 billion. The More Personal Computing division posted an 11 per cent gain in revenue to US$14.5 billion, also topping estimates.