Microsoft allays market fears with strong revenue growth forecast

A Microsoft logo is seen in Los Angeles, California, U.S., November 7, 2017. REUTERS/Lucy Nicholson

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July 26 (Reuters) – Microsoft Corp (MSFT.O) on Tuesday forecast revenue for this fiscal year to grow by double digits, driven by demand for cloud computing services and sending shares up 5%.

The bright outlook shows Microsoft continuing to benefit from the pandemic-driven shift to hybrid work models and comes at a time when investors are bracing for an economic downturn, with rampant inflation and consumers cutting back on spending.

Bob O’Donnell, analyst for TECHnalysis Research, said Microsoft forecasts show that despite negative economic trends, companies are continuing to grow their businesses and work online.

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“I don’t think that’s unique to Microsoft,” he said of the outlook. “Microsoft is extraordinarily well positioned because of the breadth of its business and the critical role its software and IT services play for organizations.”

Despite positive guidance for the fiscal year beginning July 1, Microsoft’s fourth-quarter results were a slight miss, hurt by a stronger dollar, slowing PC sales 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, general manager of investor relations at Microsoft.

Azure’s growth was 40%, missing the 43% analyst target compiled by Visible Alpha. It increased by 46% if the exchange factors are eliminated. In its expanded Intelligent Cloud division, revenue rose 20% to $20.9 billion, beating Wall Street’s average target of $19.1 billion, according to Refinitiv.

For the first quarter ending September 30, the Intelligent Cloud division is expected to bring in between $20.3 billion and $20.6 billion, with the upper end coming in slightly above analysts’ forecasts.

“We are seeing larger, longer-term commitments and won a record number of contracts over $100 million and over $1 billion this quarter,” CEO Satya Nadella said. “We have more data center regions than any other provider and we will be launching 10 regions over the next year.”

Microsoft faces pressure from a stronger greenback as it derives about half of its revenue from outside the United States. That led the company to lower its fourth-quarter profit and revenue guidance in June. Shares of the Redmond, Wash.-based company have fallen about 25% this year. Read more

The US dollar index rose more than 2% in the quarter ended June and nearly 12% this year, compared to a 1% decline a year earlier for the same period.

Without the stronger dollar, revenue growth of 12% year-over-year would have been 4 percentage points higher, Iversen told Reuters. Three main factors reduced fourth quarter revenue by approximately $1 billion.

Currency exchange rates negatively impacted revenue by nearly $600 million. A slowdown in the PC market hit Windows OEM revenue by more than $300 million. And the slowdown in ad spending has hit LinkedIn and search and news ad revenue by more than $100 million.

“With the size of Microsoft, it’s hard for them not to reflect the overall economy,” said John Freeman, vice president of equity research at CFRA Research. “We have inflation and that will obviously dampen consumer demand.”

Lower consumer demand also affected games revenue, which fell 7% year-on-year due to a decline in Xbox hardware, content and services, the company said. It is expected to drop into the low to mid-single digits this quarter, due to the decline in first-party content.

Microsoft posted fourth-quarter revenue of $51.87 billion, up from $46.15 billion a year earlier. Analysts on average had expected revenue of $52.44 billion, according to data from Refinitiv IBES.

Net income reached $16.74 billion, or $2.23 per share, in the quarter ended June 30, from $16.46 billion, or $2.17 per share, a year earlier.

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Reporting by Akash Sriram in Bengaluru and Jane Lee in San Francisco; Editing by Peter Henderson and Lisa Shumaker

Our standards: The Thomson Reuters Trust Principles.

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