Microsoft soothes market fears with strong revenue growth forecast

Microsoft soothes market fears with strong revenue growth forecast

Still benefiting from hybrid work models.

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Microsoft Corp on Tuesday forecast revenue this fiscal year would grow by double digits, driven by demand for cloud computing services and sending shares up five percent.

The strong outlook shows Microsoft continues to benefit from the pandemic-led shift to hybrid work models and comes at a time when investors are bracing for an economic downturn, with inflation soaring and consumers cutting spending.

Bob O’Donnell, an analyst for TECHnalysis Research, said Microsoft's forecast shows that despite the negative economic trends, companies continue to move more business and work online.

"I don't think it's unique to Microsoft," he said about the outlook. "Microsoft is extraordinarily well positioned because of the range of businesses it has and the critical role their software and computing services play for organizations."

Despite the positive forecast for the fiscal year starting July 1, Microsoft results for the fourth quarter amounted to a slight miss, hurt by a stronger US dollar, slowing sales of PCs and lower advertiser spending.

Still, Microsoft had its best quarter for its cloud business with record bookings for its cloud service called Azure, said Brett Iversen, Microsoft's general manager of investor relations.

Azure growth

Azure growth was 40 percent, missing the 43 percent analyst target compiled by Visible Alpha.

It was up 46 percent if foreign exchange factors are eliminated. In its broader Intelligent Cloud division, revenue was up 20 percent to US$20.9 billion (S$25 billion), ahead of the average Wall Street target of US$19.1 billion, according to Refinitiv.

For the first quarter ending September 30, the Intelligent Cloud division was forecast to bring in US$20.3 billion to US$20.6 billion, with the upper end slightly above analysts' forecasts.

"We are seeing larger and longer-term commitments and won a record number of US$100 million-plus and US$1 billion-plus deals this quarter," said CEO Satya Nadella. "We have more data centre regions than any other provider and we will launch 10 regions over the next year."

Microsoft faces pressure from a stronger greenback as it gets about half of its revenue from outside the United States. That led the company to lower its fourth-quarter profit and revenue forecasts in June.

Shares of the Redmond, Washington-based company have fallen about 25 percent this year.

Strong dollar effect

The US dollar index rose over 2 percent in the quarter ended June and nearly 12 percent this year, compared to a one percent drop a year earlier for the same period.

Without the stronger dollar, the company's 12 percent year-on-year revenue growth would have been 4 percentage points higher, Iversen told Reuters. Three main factors reduced fourth-quarter revenue by about $1 billion.

Foreign exchange negatively impacted revenue by nearly US$600 million. A slowdown in the PC market hit Windows OEM revenue by over US$300 million. And advertising spending slowdown hit LinkedIn and Search and news ad revenue by over US$100 million.

"With Microsoft being the size that they are, it's hard for them not to reflect the overall economy," John Freeman, vice president of equity research at CFRA Research. "We've got inflation and that's obviously going to dampen consumer demand."

Softer consumer demand also hit gaming revenue, which fell 7 percent year-on-year due to a drop in Xbox hardware, content and services, the company said. It is expected to fall in the low to mid-single digits this quarter, driven by declines in first-party content.

Microsoft reported revenue of US$51.87 billion in the fourth quarter, compared with US$46.15 billion a year earlier. Analysts on average had expected revenue of US$52.44 billion, according to Refinitiv IBES data.

Net income rose to US$16.74 billion, or US$2.23 per share, during the quarter ended June 30, from US$16.46 billion, or US$2.17 per share, a year earlier.

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