Microsoft's Earnings Continue to Ride Pandemic-Fueled Demand for Cloud, Videogaming -- 3rd Update
October 27 2020 - 07:48PM
Dow Jones News
By Aaron Tilley
Microsoft Corp. expects the pandemic-era surge in demand for
cloud-computing services, videogaming and computers that delivered
a solid quarter to persist at least through the rest of the
year.
The software company on Tuesday said sales rose 12% to $37.2
billion, generating a net profit of $13.9 billion in the first
quarter of its fiscal year. The results surpassed Wall Street
expectations on revenue and profit for the quarter ending in
September.
Revenue from Azure, the company's massive cloud-computing
service that has underpinned its financial success in recent years,
increased 48% from the year-ago period.
"Demand for our cloud offerings drove a strong start to the
fiscal year, " Microsoft Chief Financial Officer Amy Hood said.
Microsoft's personal computing business -- which includes
licensing revenue from PC sales, the Xbox gaming platform and
Surface laptops -- saw sales advance 6% to $11.8 billion. The
gaming content business saw a 30% jump in sales over the previous
year.
The company this quarter will release its new Xbox Series X
gaming console into one of the hottest videogaming markets. "We
expect very strong demand following the launch of our next
generation Xbox Series X and S consoles," Ms. Hood said.
Chief Executive Satya Nadella is doubling down on the company's
gaming effort. Microsoft last month said it would spend $7.5
billion to acquire ZeniMax Media Inc., the owner of game developer
Bethesda Softworks as well as the Doom videogame franchise. The
deal came shortly after Mr. Nadella's failed bid to buy parts of
the popular short-form video app TikTok from Beijing-based
ByteDance Ltd.
Microsoft forecast record-breaking sales for the current
quarter. But its projection for $13.2 billion to $13.6 billion in
revenue for the segment that included its gaming business fell
short of Wall Street's lofty expectations, sending the stock down
more than 1.5% in after-hours trading.
Throughout the pandemic, Microsoft has enjoyed a boost to its
cloud services, including its workplace-collaboration software
package Teams that offers features that compete with Slack
Technologies Inc. and video-teleconferencing service Zoom Video
Communications Inc.
Teams, Mr. Nadella said, now has more than 115 million daily
active users, up from 75 million daily active users disclosed in
April. He added that many of the changes made during the pandemic
to how people work are expected to last.
"It's clear that people will need more flexibility in when,
where and how they work," Mr. Nadella said. "The next decade of
economic performance for every business will be defined by the
speed of their digital transformation."
The shift to the cloud is expected to be a continuing focus for
companies. Research firm International Data Corporation Tuesday
said that by the end of next year it expects 80% of enterprises
will put a mechanism in place to shift to cloud-centric
infrastructure and applications -- a rate twice as fast as before
the pandemic.
Strong demand for long-term Azure contracts swelled commercial
bookings in the quarter, Microsoft said. They rose 23%
year-over-year, far ahead of the 7% and 12% increases the Redmond,
Wash.-based company saw in the previous two quarters during the
start of the coronavirus pandemic.
Azure is now a bigger source of Microsoft revenue than its
iconic Windows software package, said Brent Bracelin, an analyst at
Piper Sandler. The company doesn't break out Azure sales
figures.
Sales from commercial cloud, a broader metric of its cloud
business, reached $15.2 billion in the most recent quarter,
compared with $11.6 billion in the year-ago period.
And with people working from home and many students still stuck
learning remotely, laptops and tablets have been selling strongly.
Microsoft said sales of its Surface computing devices grew 37%.
"Enterprises are transitioning from Covid-19 triage to starting
to renew their digital transformation plans with a focus on hybrid
work. Microsoft is taking advantage of this phenomenon," said
Patrick Moorhead, president of the technology-industry analysis
firm Moor Insights & Strategy.
The increase in cloud demand hasn't been pain free, though.
Microsoft has at times struggled to keep its cloud services running
smoothly. An outage last month resulted in its cloud software tools
being inaccessible for hours.
Microsoft also could see its search-engine business, Bing, gain
momentum after the Justice Department filed an antitrust case
against Alphabet Inc.-owned Google for its practices in search and
advertising. Bing has less than 7% market share in the U.S.
search-engine market, little changed since it launched in 2009. The
Google case, though, is expected to take years to play out.
Microsoft's ad businesses, meanwhile, remains under pressure as
companies cut back on spending during the pandemic. Ad sales, the
company said, fell 10%.
Write to Aaron Tilley at aaron.tilley@wsj.com
(END) Dow Jones Newswires
October 27, 2020 19:33 ET (23:33 GMT)
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