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Microsoft Sales Rise as Remote Working Buoys Cloud Services

Microsoft so far has thrived during the Covid-19 pandemic because of its focus on cloud offerings, like Office productivity tools, Azure services and subscription programs that are less vulnerable to spending slumps.

(Bloomberg) -- Microsoft Corp. said quarterly sales and profit rose, buoyed by demand for internet-based software and cloud services needed to accommodate a shift to remote working during the coronavirus crisis.

Profit in the period ended March 31 rose to $10.8 billion, or $1.40 a share, the company said Wednesday in a statement. Sales rose 15% to $35 billion. The results from the world’s largest software maker topped analysts’ average estimates for $1.28 a share in profit and $33.7 billion in sales, according to data compiled by Bloomberg. Shares jumped in late trading.

Microsoft so far has thrived during the Covid-19 pandemic because of its focus on cloud offerings, like Office productivity tools, Azure services and subscription programs that are less vulnerable to spending slumps. Even the Windows PC-software and Surface device units did better than the company had projected, thanks to an easing in supply-chain disruptions in China just as workers began to stock up on new gear in March to outfit home offices.

“Microsoft revenue is less consumer-centric and far more recurring, and when you go to a subscription, you have a pay-for-it-or-lose-it mindset,” said Mark Moerdler, an analyst at Sanford C. Bernstein & Co.

Still, some parts of the business felt the virus’s impact. The disruption in manufacturing technology gear and components in China meant that Microsoft couldn’t expand its cloud data centers as much as planned, leading to some capacity shortages for Azure and Office cloud customers, Chief Financial Officer Amy Hood said in an interview. Issues in China have already improved and the company expects to boost capital expenditures to bolster its cloud, easing the capacity constraints by the end of the current quarter.

Other concerns may persist longer. As smaller businesses and individuals suffered from closures, lost jobs and economic upheaval in March, Microsoft saw a slowdown in one-time software purchases. Even as subscriptions become more common, many customers still buy products like Office, Windows and Windows Server in this manner, and Hood said that weakness is likely to last.

“We do expect that to continue to be impacted, as obviously everything is impacted and we need to work though this,” she said. The company’s LinkedIn corporate social network and job-finding website is also suffering amid a lack of advertising spending in general, and a dearth of open jobs that fuel listings and usage of the site.

Microsoft shares rose about 2.5% in extended trading following the report. Earlier, they closed at $177.43 in New York. The stock has gained more than 13% in 2020, giving the company a market value of $1.35 trillion -- making it the biggest U.S. publicly traded company.

While Redmond, Washington-based Microsoft had cautioned in February that the spread of the virus in China would hurt its Windows personal-computer operating system and device businesses, that unit ended up benefiting from purchases by workers worldwide who were kitting out home offices. The company also said its gaming service got a boost in engagement as homebound users sought entertainment.

Microsoft’s revenue from selling copies of Windows to computer makers and the overall PC market “really benefited from the faster-than-expected improvement in the supply chain in China as well as increased demand to support the remote scenarios we are all so familiar with,” Hood said.

Fiscal third-quarter revenue in Microsoft’s division that includes Windows, Xbox, Surface computing devices and search advertising rose 3% to $11 billion. That’s above the $10.6 billion estimate of analysts polled by Bloomberg, a notable beat in a unit coping with lower ad prices and a rocky quarter for electronics supplies, manufacturing and sales. Intel Corp., last week also reported a bump in PC demand, though the biggest computer-chip maker withdrew its full-year forecast.

The company is also still “on track” for its planned launch of a new generation of Xbox game consoles this holiday season, Hood said.

On the cloud side, Azure infrastructure services and Office 365 software, including the Teams teleconferencing app, gained from work-at-home arrangements. Azure revenue jumped 59% in the quarter, and commercial cloud revenue rose 39% to $13.3 billion. Margins widened by 4 percentage points in that business.

In the Intelligent Cloud division, sales increased to $12.3 billion, compared with an average projection for $11.7 billion. For the unit that includes Office software -- both cloud and traditional sales -- revenue climbed to $11.7 billion. That compares with the $11.5 billion average Wall Street prediction.

Microsoft shares were unchanged for the fiscal third quarter, a volatile period when global markets were buffeted by worries about the virus’ spread. That was a better performance then the 20% decline in the Standard & Poor’s 500 Index during the same period as investors bet Microsoft’s internet-based software might help it fare better than other companies, including some tech rivals that get a bigger portion of sales from the advertising market or consumer gadgets.

Fourth-quarter forecasts:

  • For the quarter ending in June, Microsoft said sales in the More Personal Computing unit will be $11.3 billion to $11.7 billion, compared with the average analyst estimate of $11.14 billion.
  • Productivity division revenue will be $11.65 billion to $11.95 billion. Analysts predicted $12.1 billion.
  • Intelligent Cloud division revenue will be $12.9 billion to $13.15 billion. The average Wall Street projection was $12.86 billion.
  • For the year that starts July 1, Hood said the company will continue to “aggressively expand” cloud infrastructure and keep up “significant investment” in its strategic priorities.
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