Microsoft Earnings Beat Expectations, Driven By Video Game Sales And Cloud Demand

Microsoft

Microsoft reported a solid quarter as the pandemic drove demand for its cloud and video game businesses.

The company on Tuesday reported $37.2 billion in revenue for the three months ending in September, well above Wall Street analysts’ prediction of $35.8 billion.
Revenue in Microsoft’s (MSFT) intelligent cloud segment reached $13 billion, up 20% from the year-ago period, including 48% year-over-year growth in Azure revenue. Personal computing revenue was up 6% to $11.85 billion, thanks to a boost from Xbox and Microsoft Surface devices sales.
Earnings for the quarter were $1.82 per share, exceeding the $1.55 per share analysts had forecast.
Microsoft CEO Satya Nadella noted that the company has benefited from accelerated adoption of digital capabilities such as cloud computing and Teams during the pandemic, even months into the crisis.
“The next decade of economic performance for every business will be defined by the speed of their digital transformation,” Nadella said on a call with analysts Tuesday.
Analysts say the company’s cloud business growth is still in its early days.
“This cloud shift and WFH dynamic looks here to stay and the company stands to be a major beneficiary of this trend,” Wedbush analyst Dan Ives said in a note to investors Tuesday.
Investors may have some concerns about Azure’s growth rate, however, despite the strong earnings. Microsoft shares fell nearly 2% in after hours trading Tuesday night. Azure’s 48% revenue growth rate during the quarter is down from 59% during the same period in the prior year.
Some analysts, however, argue this slowing growth is to be expected given the large size of the business. Nadella said Tuesday he expects tech spending to double over the next 10 years.
Gaming also presents a major growth opportunity for Microsoft.
“Gaming is one of the largest and fastest-growing forms of entertainment in the world. We expect there to be more than $200 billion of revenue in this industry in 2021,” Kyle Vikstrom, Microsoft’s director of investor relations, told CNN Business.
Microsoft is at the cusp of releasing its next-generation video game console, the Xbox Series X, and the more budget-friendly Xbox Series S next week. How the consoles sell could impact the tech company’s personal computing bottom line next quarter. The two consoles will be competing against Sony’s PlayStation 5 and a disc-less, less expensive version of that device.
“We’re seeing a really great early response to the console that’s going to launch next quarter,” Vikstrom said.
During the last quarter, Microsoft also announced it acquired ZeniMax, the parent company of video game publisher Bethesda. The acquisition gives Microsoft ownership over popular video games including the “Fallout” series, “Elder Scrolls V: Skyrim” and the “Doom” franchise. Those games could help Microsoft inch its way forward in the console wars.
Correction: Kyle Vikstrom, Microsoft’s director of investor relations, said the company expects more than $200 billion of revenue from gaming in 2021. A previous version of this story said it was expected in 2020.