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Microsoft offers strong forecast, lifting shares

Stock MarketsJan 26, 2022 04:30AM ET
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© Reuters. FILE PHOTO: A smartphone is seen in front of the Microsoft logo in this illustration photo taken July 26, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

By Nivedita Balu and Jane Lanhee Lee

(Reuters) -Microsoft Corp on Tuesday forecast revenue for the current quarter broadly ahead of Wall Street targets, 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 (NASDAQ:MSFT)'s shares in after-hours trade. But the shares reversed course following the outlook, trading 3% 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."

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.

Thill said the strong momentum for cloud computing benefiting Microsoft will likely also be reflected in upcoming results for rivals Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) Inc's Google.

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% 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% range.

Microsoft has become one of the most valuable companies in the world https://www.reuters.com/technology/apple-set-hand-crown-worlds-most-valuable-company-microsoft-2021-10-29 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-fueled shift online.

Revenue from Microsoft's biggest segment, which offers cloud services and includes Azure, its flagship cloud offering, rose 26%, while the business that houses its Office 365 services increased 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 revenue rose to $51.73 billion in the three months ended Dec. 31, 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 (NASDAQ:ATVI) https://www.reuters.com/technology/microsoft-buy-activision-blizzard-deal-687-billion-2022-01-18, announced on Jan. 18, 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%. In the past quarter, revenue rose 10%, while in the year-ago quarter it rose 40%.

"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.

Microsoft offers strong forecast, lifting shares
 

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Comments (4)
Lake Lot
Lake Lot Jan 26, 2022 2:18AM ET
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To the moon
DJ Car
DJ Car Jan 26, 2022 2:10AM ET
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They quoted a pretty unintelligent analyst.
Greg Hamilton
OptionsTrader Jan 25, 2022 5:32PM ET
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Good is the new Bad, welcome to 2022
cedrik marchand
cedrik marchand Jan 25, 2022 4:33PM ET
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and still drop
Peter ONeill
Peter ONeill Jan 25, 2022 4:33PM ET
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Like most stocks, it got carried away in the Fed-fueled bubble. PE Ratio of 35 versus a long-term average of 25 - would mean it would have to increase revenue by 40%+ to justify its overvaluation (might be forgiven in a bull market but no chance in a bear market). A 21% revenue increase is AMAZING but still not good enough versus a frothy valuation. Especially when high inflation/wage inflation / rising interest rates and international tensions could well dampen revenue growth for the next 12+ months. Still an amazing stock - hopefully falling to a better buy point.
mourad ben asker
mourad ben asker Jan 25, 2022 4:33PM ET
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nice analysis. then we are all screwed!
Rob Fordham
Rob Fordham Jan 25, 2022 4:33PM ET
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Peter ONeill they are 29 times which they should be given there growth and these numbers. Hardly carried away. Seniment is so bad right now that it doesnt matter. The fed needs to raise but the market is procing in 4 to 5 times this year. I doubt that especially given inflation will slow when omnicron abates. Maybe 2 to 3 times they raise if so this should have s 3 handle not a 2 which means u should buy
Peter ONeill
Peter ONeill Jan 25, 2022 4:33PM ET
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Rob Fordham  Inflation abates???? Think you've been listening to Powell and Yellen too much.  If Russia invades Ukraine - which is looking pretty likely - you are looking at $120+ Oil. Plus most employees will be looking at wage increases of at least 5%+ to account for current inflation levels in such a tight labor market. Will inflation stay at 7% once supply chains ease? No...but I can see it staying above 4%+ by the end of the year without drastic Fed intervention.
Peter ONeill
Peter ONeill Jan 25, 2022 4:33PM ET
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Rob Fordham  Plus 29?? Even after these results/revenues are taken into account they are trading at 32.25 after this Quarter. They dropped 5% after results and are now 1% higher only as they are projecting very good Q2 results. They will need to hit or surpass Q2 targets now as otherwise can see stocks getting hit hard.
 
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