Microsoft Shares Drop as Azure Cloud-Services Sales Slow

The results showed subscriptions and cloud programs like Office and Azure continuing to grow along with remote work -- but not enough for some investors.

Bloomberg News

July 23, 2020

4 Min Read
Microsoft Shares Drop as Azure Cloud-Services Sales Slow
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(Bloomberg) -- Microsoft Corp. reported slowing growth in its Azure cloud-computing business, failing to match lofty investor predictions for a continued boom in demand for internet-based services during the coronavirus outbreak.

Azure revenue rose 47% in the quarter ended June 30, missing analysts’ predictions for a 49% gain and notably lower than the 59% jump of the prior quarter. Shares slipped about 2.4% in extended trading. Overall, sales rose 13% to $38 billion, the software maker said Wednesday in a statement. Analysts polled by Bloomberg on average estimated $36.5 billion.

“Some of the bulls were hoping for more of a beat,” said Dan Ives, an analyst at Wedbush Securities.

The results showed subscriptions and cloud programs like Office and Azure continuing to grow along with remote work -- but not enough for some investors, who have bid up tech companies’ stocks on expectations that the pandemic would have benefits for their businesses. Corporate customers have been signing up for Microsoft’s Office productivity software to get programs like the Teams communications app, and have been accelerating transitions to services like Azure as they rely more on sprawling workforces that are unable to travel or come into offices.

Investors pushed Microsoft’s stock 29% higher in the June quarter. Ives noted that some were looking for Azure growth of as much as 55%. The shares, which had risen 1.4% to $211.75 Wednesday in New York trading, fell as low as $204.52 in extended trading.

For the fiscal fourth quarter, net income was $11.2 billion, or $1.46 a share, including a 5-cent charge Microsoft took for closing its retail stores, compared with estimates of $1.36 a share.

Commercial cloud revenue rose 30% to $14.3 billion. Margins for the business widened by 1% to 66%. Those numbers also represented a less rosy picture than the previous quarter, when commercial cloud revenue rose 39% and margins improved by 4%.

Chief Financial Officer Amy Hood said the Azure numbers met the company’s expectations, and commitments to the business -- which lets customers rent computing power from Microsoft servers via the internet -- in the form of bookings and future revenue were better than Microsoft projected.

“I feel pretty optimistic about where we are,” Hood said. Given the future interest, the company will continue to invest “significantly” in cloud data centers. In the fourth quarter, the company had $5.8 billion in capital expenditures, after constraints on equipment purchases in the March quarter damped spending and caused cloud-capacity issues. Hood told analysts on a conference call to expect a similar level of spending in the current quarter.

As the company contends with faltering economic growth and the pandemic, Microsoft will continue to invest, Chief Executive Officer Satya Nadella said on the call.

“I’m not trying to match some artificial double-digit growth number, nor are we trying to think about some margin target,” Nadella said. “The world will come out of this, and we will come out stronger if we invest during this phase.”

Economic weakness is hitting other parts of Microsoft’s business. On Monday, the company’s LinkedIn professional-networking unit said it would cut 960 jobs, or about 6% of its workforce, because few companies are hiring. Revenue at LinkedIn gained 10% in the June period, Microsoft said Wednesday.

One-time purchases of software have also been curtailed, which caused the company’s Productivity software unit to fall slightly short. Revenue was $11.8 billion, compared with an $11.9 billion average estimate of analysts polled by Bloomberg. Consumers bought more subscriptions for cloud-based versions of Office, but that revenue gets recorded over time, instead of the immediate sales bump from individual purchases of a copy of Office.

“A lot of that gets recognized in future quarters,” Hood said. “That’s probably remote work and learn demand showing itself in subscriptions, which is a good thing.”

That issue will persist into the current quarter. Hood forecast revenue for the Productivity division will range from $11.65 billion to $11.9 billion, below the $12.16 billion average estimate of analysts polled by Bloomberg.

Windows software for personal computers and Surface devices continued to sell well, with demand fueled by workers who need better gear at home. That was especially strong in April because devices were in short supply the previous quarter, Hood said.

Another part of Microsoft’s business benefiting from homebound customers is gaming. Revenue from Xbox games and services jumped 65% in the quarter. Hood reiterated that the company’s newest Xbox console is running on time for a holiday-season release.

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