Microsoft sales grow on cloud strength, shares dip on heightened valuation

[BENGALURU] Microsoft Corp on Tuesday met analysts' quarterly sales expectations and beat profit estimates, but its shares fell slightly as investors hoped for an even stronger performance after a year-long rally to a massive market valuation.

The Redmond, Washington company has become one of the world's most valuable companies, worth close to US$2 trillion after its stock jumped 50 per cent over the past year, by entering the booming market for cloud computing.

Microsoft has remained a household name during the pandemic through its Teams collaboration software.

Sales have even boomed for its Windows operating system for PCs, which had waned for decades as smartphone have proliferated.

Microsoft's Azure cloud service is closing ground on market-share leader Amazon Web Services, and it is doubling down on productivity software used by businesses worldwide.

Revenue and adjusted earnings per share for the third quarter ended March 31 were US$41.7 billion and US$1.95 per share, above analysts' estimates of US$41.03 billion and US$1.78 per share, according to data from Refinitiv.

Shares initially fell as much as 3.2 per cent after the results were released, but they pared losses to 1.7 per cent, at US$257.50, after Microsoft 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.

"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 per cent at US$17.7 billion. Sales for Dynamics 365, which competes directly with Salesforce.com, rose 45 per cent and the business version of Office 365 added 15 per cent more users.

"That's the fourth consecutive quarter of 15 per cent 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 Inc for US$16 billion, excluding net debt, to bolster its healthcare business.

Microsoft said Azure, its closely watched cloud computing business that competes with Amazon.com Inc's Amazon Web Services and Alphabet Inc's Google Cloud, grew 50 per cent in the quarter, or 46 per cent when adjusted for currency variations.

This is down from a currency-adjusted 48 per cent the quarter before but in line with analysts' expectations of 46.3 per cent growth, according to data from Visible Alpha.

Overall sales at Microsoft's "intelligent cloud" unit that contains Azure were US$15.1 billion, above analysts' estimates of US$14.92 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 US$13.6 billion, compared with estimates of US$13.49 billion, according to Refinitiv.

Sales for its LinkedIn social network were up 23 per cent on a currency adjusted basis, slightly above Visible Alpha estimates of 21.9 per cent, 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 US$13.0 billion in sales, compared with analysts' expectations of US$12.57 billion, according to Refinitiv data. Sales of Windows to PC makers were up 10 per cent, compared to a 1 per cent rise the quarter earlier.

On a call with investors, Microsoft forecast fiscal fourth-quarter productivity segment revenue with a midpoint of US$13.93 billion, above Refinitiv estimates of US$13.57 billion.

Its sales forecasts for its intelligent cloud and personal computing businesses had midpoints of US$16.32 billion and US$13.80 billion, respectively, above estimates of US$16.0 billion and US$13.26 billion, according to Refinitiv data.

AFP