Microsoft’s cloud performance lags Wall Street’s highest hopes

A smartphone is seen in front of the Microsoft logo in this illustration photo taken July 26, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

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Jan 25 (Reuters) – Microsoft Corp (MSFT.O) hit Wall Street’s cloud services revenue targets on Tuesday, but that wasn’t enough for some of the most optimistic investors and shares fell 4 % in extended trade.

Investors are looking to ensure the enterprise cloud business continues to grow strongly and will also be looking at upcoming financial reports from rivals Microsoft Amazon and Google.

Microsoft’s total revenue for the second quarter exceeded expectations, but the outperformance was not passed on to the Azure cloud service. Azure’s revenue growth of 46% was in line with analyst expectations compiled by Visible Alpha, but demonstrated a steady decline from fiscal year 2020, when growth was around 60%.

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Following Microsoft’s disappointing report, shares of Apple Inc (AAPL.O), Amazon.com Inc, Alphabet Inc (GOOGL.O) and Tesla Inc (TSLA.O) all fell more than 1%.

David Wagner, portfolio manager at Aptus Capital Advisors, said the pace of growth in Azure, the company’s fastest-growing, Wall Street-focused segment, was “worrying” and Wedbush analyst, Dan Ives said the stock fell because some Wall Street bulls were expecting it. 48% growth.

“It all boils down to guidance on the call, this will be the focus for the Street to assess broader enterprise/cloud spend for the remainder of 2022 in this white join context,” Ives wrote. . He called Microsoft’s performance “robust” and a sign that the company “continues to see strength on the ground.”

Microsoft has become one of the world’s most valuable companies by betting heavily on enterprise software and services, particularly its cloud services and the web-to-web move of its Outlook email and calendar software, known as of Office 365.

The shift to working and learning from home during the pandemic has also drawn more users to Microsoft’s office communication software and services such as Teams and Office 365. And demand for cloud services from Microsoft and its rivals Amazon.com and Alphabet surged as the pandemic outbreak accelerated a move online.

Scott Kessler, vice president and global head of Third Bridge in New York, said a major question relates to the sustainability of pandemic-led growth.

“We’ve seen many early COVID darlings become fallen angels. Now many are wondering how far Microsoft’s revenue has been pulled forward.”

Revenue from Microsoft’s largest segment, which offers cloud services and includes Azure, its flagship cloud offering, grew 26%, while the business that hosts its Office 365 services grew 19% 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 its revenue hit $51.73 billion in the three months ended Dec. 31, up from $43.08 billion a year earlier.

Analysts on average had expected revenue of $50.88 billion, according to Refinitiv data.

Investors are also focused on Microsoft’s proposed $69 billion acquisition of Activision Blizzard Inc (ATVI.O), announced on January 18, a huge expansion for its games division. It also expands the company’s efforts in what’s called the metaverse, or the merging of the online and offline worlds, which will have enterprise and consumer applications.

Microsoft said the Activision Blizzard deal will help boost Xbox content and services revenue when it closes. Growth has fallen sharply from its peak in the fourth quarter of fiscal 2020, when Xbox content and services grew 65%. In the last quarter, revenues increased by 10%, whereas a year ago they had increased by 40% in the same quarter.

“They’ve got a ton of great content and franchises. And that’s where that revenue will end up going when the deal closes, for sure,” said Brett Iversen, general manager of investor relations at Microsoft. , referring to the deal with Activision.

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Reporting by Nivedita Balu in Bengaluru, Jane Lanhee Lee in Oakland, California, and Danielle Kaye in New York Editing by Sriraj Kalluvila, Peter Henderson and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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