Microsoft earnings rise as pandemic boosts cloud computing, Xbox sales

Microsoft earnings rise as pandemic boosts cloud computing, Xbox sales

FILE PHOTO: A Microsoft logo is seen in Los Angeles
A Microsoft logo is seen in Los Angeles, California, on Nov 7, 2017. (Photo: REUTERS/Lucy Nicholson)

NEW YORK: Microsoft on Tuesday (Jan 26) reported its Azure cloud computing services grew 50 per cent, the second quarter of acceleration in a business that had begun to slow as the global pandemic benefited the software maker's investment on working and learning from home.

The company's shares rose 4 per cent in extended trading after gaining about 41 per cent in 2020 as COVID-19 shifted computing to areas where the software maker has bet big. It also saw a surprise recovery in sales on the LinkedIn professional social network and navigated a chip shortage that had threaten to hold back its Xbox business.

The shift to work from home due to the COVID-19 pandemic has accelerated enterprises' switch to cloud-based computing, benefiting Microsoft and rivals such as Inc's cloud unit and Alphabet Inc's Google Cloud.

Microsoft was expected to give more information on a conference call with investors but technical problems disrupted the Teams presentation shortly after it started at 5.30pm ET and it resumed a few minutes later.

Microsoft said revenue in its "Intelligent Cloud" segment rose 23 per cent to US$14.6 billion, with 50 per cent growth in Azure. Analysts had expected a 41.4 per cent growth in Azure, according to consensus data from Visible Alpha. The previous quarter Azure grew 48 per cent.

"This was really driven by continued customer demand, with stronger-than-expected consumption as customers have increased their focus on digital transformation," Microsoft Chief Financial Officer Amy Hood told Reuters in an interview.

Atlantic Equities analyst James Cordwell said that last year, "economic weakness and delays in implementation had masked the extent to which Azure was benefiting from the accelerated shift to the cloud caused by the pandemic. But with these results that benefit is now plain to see".

LinkedIn revenue growth, which dipped as the pandemic shut down businesses, reached 23 per cent, near its pre-pandemic rate of 24 per cent a year earlier. Hood said advertisements on LinkedIn drove the increase.

"We continue to see advertising market recovery," she said.

Microsoft bundles several sets of software and services such as Office and Azure into a "commercial cloud" metric that investors watch closely to gauge the company's progress in selling to large businesses.

Commercial cloud gross margins - a measure of the profitability of its sales to large businesses - were 71 per cent in the quarter, compared with 67 per cent a year earlier.

Revenue from its personal computing division, which includes Windows software and Xbox gaming consoles, rose 14 per cent to US$15.1 billion, driven by strong Xbox content and services growth, beating analysts' estimates of US$13.5 billion, according to IBES data from Refinitiv.

Microsoft in November released two new Xbox consoles, its most visible non-work and non-school brand, but the hardware proved difficult to find as a global semiconductor shortage contributed to tight stocks as many retailers. Xbox hardware sales were up 86% despite the shortages, and Hood said growth is likely to continue, with older models also contributing to sales.

"Demand still outpaces supply, and we do expect that to continue," Hood said. "The team did a nice job of getting consoles, both of this newest generation as well as continuing to sell the older generation, which provides a great value for gamers."

Microsoft's gaming business topped US$5 billion in quarterly sales for the first time ever and was propelled by gaming subscriptions and sales as well as new consoles. Microsoft said Xbox content and services revenue grew 40 per cent in the quarter.

The software giant's overall revenue rose to US$43.08 billion in the second quarter ended Dec 31, from US$36.91 billion a year earlier, beating analysts' estimates of US$40.18 billion, according to IBES data from Refinitiv.

Source: Reuters