MSFT Microsoft Corporation

By Aaron Tilley 

Microsoft Corp. extended its pandemic-fueled run of strong quarterly earnings that have bolstered investor enthusiasm in the software giant, bringing the company near a $2 trillion valuation.

Microsoft has seen massive growth across its professional and consumer businesses with people stuck at home and remote work and distance education becoming the norm for many. That has driven rapid uptake of its cloud-computing services and supercharged the company's videogaming sales. Microsoft's stock is up around 50% over the past year, driving the company's valuation to about $1.97 trillion, second only to Apple Inc.

"Over a year into the pandemic, digital adoption curves aren't slowing down. They're accelerating, " Microsoft Chief Executive Satya Nadella said in a statement.

The Redmond, Wash., company posted a 19% increase in its fiscal third-quarter sales to about $41.7 billion, generating net income of $15.5 billion for the January through March period. The results beat Wall Street expectations, according to FactSet.

Microsoft shares retreated around 3% in after-hours trading after a strong run-up in the stock ahead of earnings.

"Now there are worries about the sustainability of Microsoft post-pandemic," said Rishi Jaluria, an analyst for investment research firm D.A. Davidson & Co.

Microsoft's hardware sales were affected by chip shortages, said Kyle Vikström, a director of investor relations at the company. The impact was chiefly on its Xbox gaming consoles and Surface laptops, she said.

The company's videogaming activity has been particularly hot during the pandemic. Xbox content and services revenue increased 34% in the latest quarter aided by the recent release of two new consoles, Xbox Series X and S. Xbox hardware revenue more than tripled from the previous year.

Revenue from Surface laptops, which have been popular with people working and learning from home, rose 12% from a year ago. Surface sales are expected to decline in the current quarter, Chief Financial Officer Amy Hood said on an analyst call, in part because of the chip-supply issues.

Strong demand for cloud services late last year helped Microsoft reverse a trend of a gradually declining pace of growth. The company said sales linked to Azure cloud services advanced 50% in the most recent quarter, on par with the December quarter.

Azure, the collection of a global network of data centers and software tools Microsoft sells as a service, last year became a larger revenue source for the company than its Windows operating system, Piper Sandler analyst Brent Bracelin has said. Microsoft is No. 2 in the cloud behind Amazon.com Inc.

Azure growth had been slowing before the pandemic hit as the business gained scale. Microsoft sees a return to that pattern as likely.

"We're getting into the law of large numbers" on Azure's growth, said Microsoft's Ms. Vikström. "We expect over time that it's going to decelerate as numbers get bigger."

Microsoft also was able to popularize during the pandemic its Teams workplace collaboration suite that offers features competing with companies such as Zoom Video Communications Inc. and Slack Technologies Inc. Teams usage rose from 20 million active users before the pandemic in November 2019 to reach more than 145 million today, Mr. Nadella said.

Microsoft also benefited from the broad strength in the advertising market. Its search advertising business was up 17%, and ad-spending also helped lift revenue at LinkedIn, the professional social-media network, by 25%.

Tech rival Alphabet Inc. on Tuesday reported a 34% jump in first-quarter sales from the year earlier, driven by a surge in digital ad spending.

Microsoft's Ms. Hood said she expected "another strong quarter" for the three months ending in June. The company forecast $43.6 billion to $44.5 billion in sales in the three-month period, beating Wall Street expectations.

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Write to Aaron Tilley at aaron.tilley@wsj.com

(END) Dow Jones Newswires

April 27, 2021 18:49 ET (22:49 GMT)

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