Microsoft earnings jump on pandemic-driven cloud, videogaming demand

Shares of tech giant are up more than 40% in the past year

Microsoft Corp. posted record quarterly sales underpinned by pandemic-fueled demand for videogaming and accelerated adoption of its cloud-computing services as businesses continued to embrace new digital tools during the health crisis.

The remote-work era has been a boon for Microsoft. In addition to its videogaming and cloud-computing products, the company has notched strong sales of its Surface laptops as people bought devices to facilitate working from home and distance learning. The use of Microsoft’s Teams workplace-collaboration software, which has been a priority for Chief Executive Satya Nadella, has jumped during the pandemic with its offering of such services as text chat and videoconferencing.

“What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry,” Mr. Nadella said Tuesday.

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The software giant said its fiscal second-quarter net income rose more than 30% to $15.5 billion. Sales advanced 17% to $43.1 billion. Those figures beat Wall Street’s expectation of net income of $12.6 billion and sales of $40.2 billion, according to FactSet.

Microsoft shares were ahead 4% in after-hours trading. The stock gained more than 40% over the past year.

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Mr. Nadella’s bet on cloud computing has been pivotal to Microsoft’s multi-year run of year-over-year sales increases. Sales for the company’s Azure cloud-services have expanded rapidly; however, before the pandemic hit the pace of growth was slowing as the business gained scale. Remote working arrested that decline. Azure sales increased 50% in the most quarter ended Dec. 31, compared with a 48% rise for the prior three-month period.

Azure became a bigger source of revenue for Microsoft than its Windows operating system licenses in the September quarter, said Brent Bracelin, an analyst at Piper Sandler. Microsoft doesn’t break out Azure revenue, but the company is the world’s second-largest cloud-computing vendor after Amazon.com Inc.

The role of videogaming in Microsoft’s fortunes also has increased under Mr. Nadella, in part fueled by acquisitions. The company last year bought ZeniMax Media Inc., the parent company of the popular Doom videogame franchise, for $7.5 billion. Xbox content and services revenue increased 40% in the latest quarter, aided by the November release of two new gaming consoles, Xbox Series X and S, to battle Sony Corp.’s PlayStation 5.

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Overall gaming revenue was up 51%. Microsoft said revenue in the business segment that includes videogame and laptop activities rose to $15.1 billion, topping even the $14.6 billion its cloud-segment delivered.

For Microsoft, the consoles, a relatively low-margin business, are less important to its bottom line than hooking gamers on subscription services for its games. But the company last week misstepped when it tried to push through a price hike for some of those services. Customers revolted, and the software giant reversed course hours later.

Microsoft saw continued strength in its Surface laptop business, with revenue rising 3% as the work-from-home period drags on. The increase, though, didn’t match the supercharged 37% sales gain in the prior quarter.

“The pandemic has really shown the PC’s central role in keeping people connected, productive and secure,” said Kyle Vikstrom, a director of investor relations at Microsoft.

Revenue from licenses for Windows software rose 1%. Mr. Vikstrom said the result beat Microsoft’s internal projections, in matching up against a strong prior-year quarter when customers were upgrading the software after the company began phasing out support for Windows 7.

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Strong demand for business software has fueled competitive pressure on Microsoft. Business-software vendor Salesforce.com Inc. last month said it would spend around $27.7 billion to buy Slack Technologies Inc., maker of a popular chat-based workplace-collaboration platform. With Slack, Salesforce is looking to more aggressively target a core business of Microsoft. The deal is expected to close in the coming months.

Microsoft said even its advertising business, one of the few segments that lagged early in the pandemic, is showing signs of recovery. Search advertising revenue in the most recent quarter advanced 2% after suffering double-digit declines in the prior two periods.