Microsoft sees growth in cloud business, but supply issues continue for Xbox

By Subrat Patnaik and Stephen Nellis

(Reuters) -Microsoft Corp forecast a healthy end to the year on Tuesday thanks to its booming cloud business, but said supply chain issues will continue to weigh on key units such as those that produce its Surface laptops and Xbox gaming consoles.

The company beat Wall Street expectations for its first quarter ended September 30, with pandemic-induced demand for the software giant’s cloud services driving sales.

Contracts for cloud services provided by Microsoft, Inc’s AWS, and Alphabet Inc’s Google Cloud have increased since last year, when the COVID-19 pandemic shut down offices and schools, pushing more activity online.

Q1 revenue growth for Azure, the company’s flagship cloud computing business, was 48% in constant currency, beating analyst estimates by 47.5%, according to consensus data from Visible Alpha. Amy Hood, executive vice president and chief financial officer of Microsoft, said the company also expected “extensive growth” for the unit in the second fiscal quarter.

Azure’s growth rate is the best direct measure of competition with competitors like AWS and Google Cloud, as Microsoft does not split the cloud computing unit’s revenue.

Microsoft appeared to resist the growing challenge from Google Cloud. Google Cloud said on Tuesday that its revenue had jumped 45% to $ 4.99 billion, but fell short of estimates of $ 5.2 billion.

Revenue from the company’s other business units that host Windows software, the Teams messaging service, and the professional social networking platform LinkedIn also exceeded analysts’ expectations.

Supply chain issues affecting much of the global tech industry have had mixed consequences for Microsoft.

Hood said Microsoft has continued to increase its cloud computing margins despite higher data center construction costs as it continues to add more profitable services to those data centers. Hood also said the company was able to ship more Xbox S and X game consoles than expected in the first quarter – sales of game consoles and accessories were up 166%, with the company continuing to see strong demand for new models after the pandemic forced millions to seek entertainment at home.

But Microsoft and its competitors have been unable to meet demand due to the global chip crisis. Hood told Reuters the company expects demand for Xbox to continue to exceed supply in the company’s second quarter, which includes Christmas.

She also said sales of the company’s Surface computers, which fell 17% in the fiscal first quarter, are expected to continue to decline in the second quarter as supply chain shortages hit high-end items in the line. .

Microsoft’s revenue from selling Windows to PC makers grew 10% year-over-year, beating the overall PC market, which grew only 3.9% on the year-over-year. same period due to supply constraints, according to IDC data.

Hood said the company is able to outperform the PC market because of its strength in selling Windows licenses to businesses, where it gets more revenue per license and has a better market share.

Overall, revenue rose 22% to $ 45.32 billion in the first quarter ended September 30, beating expectations by around $ 43.97 billion.

Net income reached $ 20.51 billion, or $ 2.71 per share. The company said its results included a net tax benefit of $ 3.3 billion.

On an adjusted basis, it gained $ 2.27 per share, beating analysts’ expectations of $ 2.07 per share.

For the second fiscal quarter, Microsoft predicted median revenue of $ 18.23 billion for its smart cloud business for the second fiscal quarter, above estimates of $ 17.84 billion, according to the data. by Refinitiv.

Intelligent Cloud’s first-quarter revenue jumped 31% to $ 17 billion. Analysts had expected a figure of $ 16.58 billion, according to data from Refinitiv.

Microsoft’s forecast for its Windows-centric software applications and segments with midpoints of $ 15.83 billion and $ 16.55 billion, respectively, was also higher than Refinitiv’s estimate of $ 15.40 billion and $ 15.51 billion.

Shares of the company, which have risen nearly 40% this year, edged up in extended trading.

(Reporting by Subrat Patnaik in Bengaluru and Stephen Nellis in San Francisco; Editing by Aditya Soni and Sonya Hepinstall)

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