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Jul 27, 2021

Microsoft posts sales, profit gain; shares drop on Azure concern

Darren Sissons discusses the FAANG stocks and Microsoft

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Microsoft Corp. reported sales and profit that exceeded analysts’ estimates for a 10th straight quarter, though investor optimism was tempered by concern about slowing growth in the software giant’s Azure cloud-computing business. Shares slipped in late trading.

Sales in the fourth quarter, which ended June 30, climbed 21 per cent to US$46.2 billion, the Redmond, Washington-based company said Tuesday in a statement. That compared with the US$44.3 billion average estimate of analysts polled by Bloomberg. Net income rose to US$16.5 billion, or US$2.17 a share, while analysts had predicted US$1.92.

Microsoft’s market value now tops US$2 trillion, and the high-flying shares have led investors to expect results to outdistance projections by a wide margin, said Brent Thill, an analyst at Jefferies, in a note before the numbers were released. Azure sales increased 51 per cent in the period, and some investors hoped for a faster rate of growth, especially because that revenue rose 45 per cent when accounting for currency fluctuations. While Azure has been growing steadily, it faces steep competition for big deals from Amazon.com Inc., the dominant cloud service, and Google, which ranks third in the market but is pouring resources into the business as it works to catch up.

“People are not happy if Azure decelerates -- they’re worried the good days are over,” said Mark Moerdler, an analyst at Sanford C. Bernstein. “People seem to worry Azure will never be as big as Amazon.”

Azure revenue had gained 50 per cent from a year earlier for the two prior quarters, not taking into account currency fluctuations. In the March quarter, Azure posted a 46 per cent sales gain in constant currency -- so on that basis, the recent period’s increase marked a slowdown.

Microsoft shares dropped about 2.5 per cent in extended trading following the report, after declining to US$286.54 in New York. The stock rose 15 per cent in the fiscal fourth quarter, compared with 8.2 per cent for the S&P 500 Index, reflecting investor optimism about growth prospects for Azure, Office, artificial intelligence and gaming.

Commercial cloud sales in the fiscal third quarter rose 36 per cent to US$19.5 billion, Microsoft said. Gross margin, or the percentage of sales left after subtracting production costs, in that business widened 4 percentage points to 70 per cent, the company said in a slide posted on its website. Total company gross margins have been benefiting from an accounting change that’s related to current and future server and network equipment, and this may be the last quarter where that leads to an improved margin, according to Bloomberg Intelligence analyst Anurag Rana.

“This year has been great because of the accounting change but that particular boost is hiding the fact that gross margin is being hurt by the faster-growing Azure business,” Rana said before the results.

In the Productivity unit, mostly made up of Office software, sales were US$14.7 billion, compared with an average analysts’ estimate of US$14 billion. Sales of Intelligent Cloud products rose to US$17.4 billion, above analysts’ expectations for revenue of US$16.4 billion.

In the More Personal Computing unit, which includes products like Windows, Surface and Xbox, sales were US$14.1 billion. Analysts had expected US$13.9 billion. Sales of Windows software sold to PC manufacturers declined 3 per cent, a drop that reflects the surge in laptop buying in the same quarter a year earlier, when COVID-19 lockdowns were forcing many workers to do their jobs remotely.

Overall gaming revenue jumped 11 per cent in the recent period, Microsoft said, with Xbox hardware sales more than doubling. A global semiconductor shortage has constrained sales of Xbox consoles following the release of a new machine late last year, and growth in video-game and gaming services fell 4 per cent in the quarter compared with the pandemic-boosted year-ago period.