WSJ US BusinessMicrosoft Cloud, Videogaming Help Fuel Record Sales

January 26, 20210

Microsoft Corp. MSFT 1.22% posted record quarterly sales underpinned by pandemic-fueled demand for videogaming and accelerated adoption of its cloud-computing services as businesses continued to embrace new digital tools during the health crisis.

The remote-work era has been a boon for Microsoft. In addition to its videogaming and cloud-computing products, the company has notched strong sales of its Surface laptops as people bought devices to facilitate working from home and distance learning. The use of Microsoft’s Teams workplace-collaboration software, which has been a priority for Chief Executive Satya Nadella, has jumped during the pandemic with its offering of such services as text chat and videoconferencing.

“What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry,” Mr. Nadella said Tuesday.

The software giant said its fiscal second-quarter net income rose more than 30% to $15.5 billion. Sales advanced 17% to $43.1 billion. Those figures beat Wall Street’s expectation of net income of $12.6 billion and sales of $40.2 billion, according to FactSet.

Microsoft shares were ahead 4% in after-hours trading. The stock gained more than 40% over the past year.

Tech companies broadly have been among the biggest corporate winners during the pandemic and have drawn investor enthusiasm. Apple Inc., which reports earnings Wednesday, has seen its stock rise about 80% over the past year as people sheltering at home bought Mac computers and iPads. Online retailer Inc. has piled up revenue, including in its cloud-computing business that competes with Microsoft’s offering.

Microsoft finance chief Amy Hood told analysts Tuesday that further growth is expected in the current quarter. Sales are projected to come in at $40.35 billion to $41.25 billion, the company said. Videogaming should see around 40% growth from a year earlier, with Surface laptop sales also enjoying double-digit increases, Ms. Hood said.

Mr. Nadella’s bet on cloud computing has been pivotal to Microsoft’s multiyear run of year-over-year sales increases. Sales for the company’s Azure cloud-services have expanded rapidly; however, before the pandemic hit the pace of growth was slowing as the business gained scale. Remote working arrested that decline. Azure sales increased 50% in the most quarter ended Dec. 31, compared with a 48% rise for the prior three-month period.

Azure became a bigger source of revenue for Microsoft than its Windows operating system licenses in the September quarter, said Brent Bracelin, an analyst at Piper Sandler. Microsoft doesn’t break out Azure revenue, but the company is the world’s second-largest cloud-computing vendor after Inc.

The role of videogaming in Microsoft’s fortunes also has increased under Mr. Nadella, in part fueled by acquisitions. The company last year bought ZeniMax Media Inc., the parent company of the popular Doom videogame franchise, for $7.5 billion. Xbox content and services revenue increased 40% in the latest quarter, aided by the November release of two new gaming consoles, Xbox Series X and S, to battle Sony Corp.’s PlayStation 5.

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Mr. Nadella hailed the start for the Xbox consoles, marking “the most devices ever sold in a launch month.”

Overall gaming revenue was up 51%. Microsoft said revenue in the business segment that includes videogame and laptop activities rose to $15.1 billion, topping even the $14.6 billion its cloud-segment delivered.

For Microsoft, the consoles, a relatively low-margin business, are less important to its bottom line than hooking gamers on subscription services for its games. But the company last week misstepped when it tried to push through a price hike for some of those services. Customers revolted, and the software giant reversed course hours later.

Microsoft saw continued strength in its Surface laptop business, with revenue rising 3% as the work-from-home period drags on. The increase, though, didn’t match the supercharged 37% sales gain in the prior quarter.

“The pandemic has really shown the PC’s central role in keeping people connected, productive and secure,” said Kyle Vikstrom, a director of investor relations at Microsoft.

Revenue from licenses for Windows software rose 1%. Mr. Vikstrom said the result beat Microsoft’s internal projections, in matching up against a strong prior-year quarter when customers were upgrading the software after the company began phasing out support for Windows 7.

Strong demand for business software has fueled competitive pressure on Microsoft. Business-software vendor Inc. last month said it would spend around $27.7 billion to buy Slack Technologies Inc., maker of a popular chat-based workplace-collaboration platform. With Slack, Salesforce is looking to more aggressively target a core business of Microsoft. The deal is expected to close in the coming months.

Microsoft said even its advertising business, one of the few segments that lagged early in the pandemic, is showing signs of recovery. Search advertising revenue in the most recent quarter advanced 2% after suffering double-digit declines in the prior two periods.

LinkedIn, the business-focused social-media network owned by Microsoft, recorded a 23% rise in sales, outpacing the growth of the prior quarter. “That speaks to the recovering economy,” said Rishi Jaluria, an analyst for investment research firm D.A. Davidson & Co. “This means business is hiring again.”

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