Microsoft Says Supply Woes to Continue for Xbox, Sees Cloud Business Growth

Contracts for cloud services provided by Microsoft have surged since last year due to the COVID-19 pandemic.

By Reuters | Updated: 27 October 2021 10:22 IST

Microsoft Says Supply Woes to Continue for Xbox, Sees Cloud Business Growth

Microsoft continued to increase its cloud computing margins despite higher data centre construction costs

Highlights

Microsoft and its rivals have been unable to keep up with demand
Revenue from selling Windows to PC makers grew 10 percent year over year
First-quarter revenue from "Intelligent Cloud" surged 31 percent

Microsoft on Tuesday forecast a strong end to the calendar year thanks to its booming cloud business but said supply chain woes will continue to dog key units such as those producing its Surface laptops and Xbox gaming consoles.

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

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

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First-quarter revenue growth for Azure, the company's flagship cloud-computing business, came in at 48 percent in constant currency to beat analysts' estimates of 47.5 percent, according to consensus data from Visible Alpha. Amy Hood, executive vice president and chief financial officer of Microsoft, said that the company also expected "broad based growth" for the unit in the fiscal second quarter.

Azure's growth rate is the best direct measure of competition with rivals such as AWS and Google Cloud as Microsoft does not break out revenue from the cloud-computing unit.

Microsoft appeared to hold off Google Cloud's rising challenge. Google Cloud said on Tuesday its revenue surged by 45 percent to $4.99 billion (roughly Rs. 37,430 crore), but failed to live up to estimates of $5.2 billion (roughly Rs. 39,000 crore).

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Revenue at the firm's other business units that house Windows software, the Teams messaging service and LinkedIn professional social networking platform also beat analyst expectations.

The supply chain issues affecting much of the global tech industry had mixed consequences for Microsoft.

Hood said Microsoft has continued to increase its cloud computing margins despite higher data centre construction costs because it keeps adding more profitable services to those data centres. Hood also said that the company was able to ship more Xbox S and X gaming consoles than it expected in the first quarter - sales of gaming consoles and accessories were up 166 percent as the company continued to see strong demand for new models after the pandemic forced millions to seek entertainment at home.

But Microsoft and its rivals have been unable to keep up with demand because of the global chip crunch. Hood told Reuters the company expects Xbox demand to continue to exceed supply in the company's second quarter, which includes Christmas.

She also said that sales of the company's Surface computers, which declined 17 percent in the fiscal first quarter, were likely to keep sinking in the second quarter, with supply chain shortages hitting premium items in the lineup.

Microsoft's revenue from selling Windows to PC makers grew 10 percent year over year, beating the overall PC market, which only grew 3.9 percent over the same period because of supply constraints, according to data from IDC.

Hood said that the company was able to outperform in the PC market because of its strength in selling licenses for Windows destined for corporate customers, where it gets more revenue per license and has better market share.

Overall, revenue rose 22 percent to $45.32 billion (roughly Rs. 3,39,990 crore) in the first quarter ended September 30, beating expectations of about $43.97 billion (roughly Rs. 3,29,800 crore).

Net income rose to $20.51 billion (roughly Rs. 1,53,840 crore), or $2.71 (roughly Rs. 200) per share. The company said its results included a $3.3 billion (roughly Rs. 24,750 crore) net income tax benefit.

On an adjusted basis it earned $2.27 (roughly Rs. 170) per share, trumping analyst expectations of $2.07 (roughly Rs. 155) per share.

For the fiscal second quarter, Microsoft predicted a midpoint of $18.23 billion (roughly Rs. 1,36,720 crore) in revenue for its intelligent cloud business for the fiscal second quarter, above estimates of $17.84 billion (roughly Rs. 1,33,770 crores), according to Refinitiv data.

First-quarter revenue from "Intelligent Cloud" surged 31 percent to $17 billion (roughly Rs. 1,27,470 crore). Analysts had expected a figure of $16.58 billion (roughly Rs. 1,24,325 crore), according to Refinitiv data.

Microsoft's forecast for its software app and Windows centric segments with midpoints of $15.83 billion (roughly Rs. 1,18,700 crore) and $16.55 billion (roughly Rs. 1,24,090 crore), respectively, were also above Refinitiv estimates of $15.40 billion (roughly Rs. 1,15,470 crore) and $15.51 billion (roughly Rs. 1,16,290 crore).

© Thomson Reuters 2021

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