Microsoft beats Q3 revenue expectations, spurred by strong cloud sales

(Reuters) — Microsoft on Tuesday met analysts’ quarterly sales expectations and beat profit estimates, but its shares fell slightly as investors hoped for an even stronger performance after a year-long rally to a massive market valuation.

The Redmond, Washington company has become one of the world’s most valuable companies, worth close to $2 trillion after its stock jumped 50% over the past year, by entering the booming market for cloud computing.

Microsoft has remained a household name during the pandemic through its Teams collaboration software. Sales have even boomed for its Windows operating system for PCs, which had waned for decades as smartphone have proliferated.

Microsoft’s Azure cloud service is closing ground on market-share leader Amazon Web Services, and it is doubling down on productivity software used by businesses worldwide.

Revenue and adjusted earnings per share for the third quarter ended March 31 were $41.7 billion and $1.95 per share, above analysts’ estimates of $41.03 billion and $1.78 per share, according to data from Refinitiv.

Shares initially fell as much as 3.2% after the results were released, but they pared losses to 1.7%, at $257.50, after Microsoft executives gave a better-than-expected forecast during a conference call with investors.

“One-off tax and currency advantages have boosted Microsoft’s third-quarter numbers, and as a result the market isn’t being quite as welcoming of expectation-beating numbers as you might expect,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“That is the danger of trading on the kind of valuation Microsoft enjoys, 32.8 times next year’s earnings. Disappoint even a little and the market will be unforgiving.”

Sales for what Microsoft calls its “commercial cloud” – which contains server infrastructure such as Azure along with cloud-based versions of its Office software – was up 33% at $17.7 billion. Sales for Dynamics 365, which competes directly with Salesforce.com, rose 45% and the business version of Office 365 added 15% more users.

“That’s the fourth consecutive quarter of 15% seat growth on a very large base,” Microsoft Chief Financial Officer Amy Hood said of the Office 365 results for commercial customers.

Microsoft has continued to double down on cloud-base software and said earlier this month it would buy artificial intelligence software firm Nuance Communications Inc for $16 billion, excluding net debt, to bolster its healthcare business.

Microsoft said Azure, its closely watched cloud computing business that competes with Amazon.com Inc’s Amazon Web Services and Alphabet’s Google Cloud, grew 50% in the quarter, or 46% when adjusted for currency variations. This is down from a currency-adjusted 48% the quarter before but in line with analysts’ expectations of 46.3% growth, according to data from Visible Alpha.

Overall sales at Microsoft’s “intelligent cloud” unit that contains Azure were $15.1 billion, above analysts’ estimates of $14.92 billion, according to Refinitiv data.

Microsoft Teams has 145 million daily users, up from 115 million in October, Microsoft said. Sales for Microsoft’s productivity software unit, which includes Office and Teams, were $13.6 billion, compared with estimates of $13.49 billion, according to Refinitiv.

Sales for its LinkedIn social network were up 23% on a currency adjusted basis, slightly above Visible Alpha estimates of 21.9%, as revenue continued to recover from a sharp decline in job listings and hiring at the onset of the pandemic.

Microsoft’s personal computing unit, which contains its Windows operating system and Xbox gaming console, had $13.0 billion in sales, compared with analysts’ expectations of $12.57 billion, according to Refinitiv data. Sales of Windows to PC makers were up 10%, compared to a 1% rise the quarter earlier.

On a call with investors, Microsoft forecast fiscal fourth-quarter productivity segment revenue with a midpoint of $13.93 billion, above Refinitiv estimates of $13.57 billion. Its sales forecasts for its intelligent cloud and personal computing businesses had midpoints of $16.32 billion and $13.80 billion, respectively, above estimates of $16.0 billion and $13.26 billion, according to Refinitiv data.

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