Microsoft shares bounce on strong forecast

Microsoft forecast revenue for the current quarter broadly ahead of Wall Street targets in an update after markets closed in the US on Tuesday, driven in part by its Intelligent Cloud unit.

The outlook soothed concerns about growth sparked by results for the December quarter, which initially dragged on Microsoft’s shares in after-hours trade. But the shares reversed course following the outlook, trading 3 per cent above the closing price.

Investors were seeking assurances that the enterprise cloud business is still growing strongly and got it from Microsoft.

“So the quarter itself was, ho hum. Good, but not as great as we’ve seen past quarters,” said Brent Thill, an analyst at Jefferies. “But then the guidance for the third quarter really turned the tape around and saved the Nasdaq, if you will.”

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Mr Thill said Microsoft’s guidance that Azure revenue would be up sequentially was strong assurance that cloud demand was solid.

Microsoft forecast Intelligent Cloud revenue of $18.75 billion-$19 billion for its fiscal third quarter, driven by “strong growth” in its Azure platform. That compared with a Wall Street consensus of $18.15 billion, according to Refinitiv data.

Mr Thill said the strong momentum for cloud computing benefiting Microsoft will likely also be reflected in upcoming results for rivals Amazon. com and Alphabet's Google.

Operating margins

Microsoft delivered strong outlooks in other areas, too.

The More Computing unit expects revenue of $14.15 billion-$14.45 billion for the third quarter, ahead of the Wall Street target of $13.88 billion, and Productivity and Business Processes of $15.6 billion-$15.85 billion compared with the consensus target of $15.72 billion.

Full-year operating margins are forecast to be up slightly from the previous year.

Microsoft’s total second-quarter revenue beat expectations but Azure revenue growth of 46 per cent was only in line with analyst expectations as compiled by Visible Alpha. The Azure growth showed a steady drop from fiscal 2020 when growth was in the 60 per cent range.

Microsoft has become one of the most valuable companies in the world by betting heavily on corporate software and services, especially its cloud services and the movement to the web of its Outlook email and calendar software, known as Office 365, which benefited from the switch to working and learning from home during the pandemic.

Demand for cloud services from Microsoft and rivals Amazon.com and Alphabet also benefited from the pandemic-fuelled shift online.

Revenue from Microsoft’s biggest segment, which offers cloud services and includes Azure, its flagship cloud offering, rose 26 per cent, while the business that houses its Office 365 services increased 19 per cent in the quarter.

Net income rose to $18.77 billion, or $2.48 per share, from $15.46 billion, or $2.03 per share, a year earlier.

The company said revenue rose to $51.73 billion in the three months to the end of 2021 from $43.08 billion a year earlier. Analysts on average had expected revenue of $50.88 billion, according to Refinitiv data.

Activision Blizzard

Investors are also focused on Microsoft's proposed $69 billion acquisition of Activision Blizzard, announced last week, a huge expansion for its gaming division. It also broadens the company's efforts in the so-called metaverse, or the merging of online and offline worlds, which will have corporate and consumer applications.

Microsoft said the Activision Blizzard deal would help boost Xbox content and services revenue. Growth has fallen sharply from a high in the fourth quarter of fiscal 2020 when Xbox content and services grew 65 per cent. In the past quarter, revenue rose 10 per cent, while in the year-ago quarter it rose 40 per cent.

"They have a ton of great content and franchises. And that's where that revenue would eventually come in when the deal lands, for sure," said Brett Iversen, general manager, investor relations at Microsoft, referring to the Activision deal. – Reuters