Microsoft is allaying market concerns by anticipating strong revenue growth

The Microsoft logo appears in Los Angeles, California, US, November 7, 2017. REUTERS/Lucy Nicholson

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

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

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

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«I don’t think it’s unique to Microsoft,» he said of the outlook. «Microsoft is very well positioned because of its portfolio of businesses and the critical role that its software and services for enterprises play.»

Despite positive expectations for the fiscal year beginning July 1, Microsoft’s fourth-quarter results were slightly wrong, weighed down by a stronger dollar, slowing PC sales and lower advertiser spending.

Microsoft still had the best quarter for its cloud business with record bookings for its cloud service called Azure, said Brett Iverson, Microsoft’s general manager of investor relations.

Azure’s growth was 40%, and it missed the 43% analyst target collected by Visible Alpha. It rose by 46% if foreign exchange factors were eliminated. In the broader smart 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 ended September 30, the smart cloud division was expected to bring in $20.3 billion to $20.6 billion, with the upper end slightly higher than analysts’ expectations.

“We are seeing larger and longer-term engagements and won a record number of deals in excess of $100 million and over $1 billion this quarter,” said CEO Satya Nadella. «We have more data center regions than any other provider and will launch 10 within the next year.»

Microsoft is facing pressure from the strong dollar as it gets about half of its revenue from outside the US. This led the company to lower its earnings and revenue forecast for the fourth quarter in June. Shares of the Redmond, Washington company are down about 25% this year. Read more

The US dollar index is up more than 2% in the quarter ending in June and about 12% this year, compared to a 1% decline a year earlier for the same period.

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

Foreign exchange negatively impacted revenues by about $600 million. The slowdown in the PC market has caused Windows OEM revenue of more than $300 million. The slowdown in ad spend has also affected LinkedIn, search and news ad revenue by more than $100 million.

“Because Microsoft is as big as it is, it’s hard for it not to reflect the overall economy,» said John Freeman, vice president of equity research at CFRA Research. «We have inflation and it is clear that this will reduce consumer demand.»

The company said the slump in consumer demand also affected gaming revenue, which fell 7% year-on-year due to lower Xbox hardware, content and services. It is expected to decline in low to mid single digits this quarter, driven by lower first-party content.

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

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

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Additional reporting by Akash Sriram in Bengaluru and Jane Lee in San Francisco; Editing by Peter Henderson and Lisa Schumaker

Our criteria: Thomson Reuters Trust Principles.

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