Microsoft says supply issues will continue for Xbox, sees cloud business growth

Microsoft says supply issues will continue for Xbox, sees cloud business growth

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

The company beat Wall Street expectations for the first quarter ended Sept. 30, as pandemic-induced demand for the software giant’s cloud-based services boosted sales.

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

First-quarter revenue growth for Azure, the company’s core cloud computing business, reached 48% in constant currency, beating analysts’ estimates of 47.5%, according to consensus data from Visible Alpha. Amy Hood, Microsoft’s executive vice president and chief financial officer, said the company also expects “wide-ranging growth” for the unit in the fiscal second quarter.

Azure’s growth rate is the best direct measure of competition with rivals like AWS and Google Cloud, as Microsoft does not derive revenue from the cloud computing unit.

Microsoft seemed to be putting off the growing Google Cloud challenge. Google Cloud said on Tuesday that its revenue increased by 45% to US$4.99 billion (approximately Rs. 37,430 crore) but failed to meet estimates of US$5.2 billion (approximately INR 39,000 crore).

Revenue at the company’s other business units that are home to Windows software, messaging service Teams and professional social networking platform LinkedIn also beat analysts’ expectations.

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

Hood said Microsoft has continued to grow its cloud computing margins despite higher data center construction costs because it keeps adding more profitable services to those data centers. Hood also said the company was able to ship more Xbox S and X game consoles than expected in the first quarter – sales of game consoles and accessories increased by 166% 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 meet demand because of the global chip crisis. Hood told Reuters the company expects demand for the Xbox to continue to exceed supply in the company’s second quarter, which includes Christmas.

She also said sales of the company’s Surface computers, which were down 17% in the fiscal first quarter, are likely to continue to decline in the second quarter as supply chain shortages hit premium items down the line.

Microsoft’s revenue from selling Windows to PC makers grew 10% year-over-year, outpacing the overall PC market, which grew just 3.9% over the same period due to supply constraints, according to IDC data.

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

Overall, revenue increased by 22% to USD 45.32 billion (approximately Rs. 3,39,990 crore) in the first quarter ended 30th September, beating expectations of around USD 43.97 billion (approximately Rs. 3,29,800 crore).

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

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

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

Q1 revenue of “Smart Cloud” increased by 31% to US$17 billion (approximately Rs. 1,27,470 crore). Analysts had expected a value of US$16.58 billion (about Rs.1,24,325 crore), according to Refinitiv data.

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

© Thomson Reuters 2021

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