Microsoft’s earnings continue to ride pandemic-fueled demand for cloud, videogaming

The company's sales rose 12% to $37.2 billion, generating a net profit of $13.9 billion in the first quarter of its fiscal year.

Microsoft Corp. MSFT 1.51%  expects the pandemic-era surge in demand for cloud-computing services, videogaming and computers that delivered a solid quarter to persist at least through the rest of the year.

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The software company on Tuesday said sales rose 12% to $37.2 billion, generating a net profit of $13.9 billion in the first quarter of its fiscal year. The results surpassed Wall Street expectations on revenue and profit for the quarter ending in September.

Revenue from Azure, the company’s massive cloud-computing service that has underpinned its financial success in recent years, increased 48% from the year-ago period.

“Demand for our cloud offerings drove a strong start to the fiscal year,” Microsoft Chief Financial Officer Amy Hood said.

Microsoft’s personal computing business—which includes licensing revenue from PC sales, the Xbox gaming platform and Surface laptops—saw sales advance 6% to $11.8 billion. The gaming content business saw a 30% jump in sales over the previous year.


The company this quarter will release its new Xbox Series X gaming console into one of the hottest videogaming markets. “We expect very strong demand following the launch of our next generation Xbox Series X and S consoles,” Ms. Hood said.

Chief Executive Satya Nadella is doubling down on the company’s gaming effort. Microsoft last month said it would spend $7.5 billion to acquire ZeniMax Media Inc., the owner of game developer Bethesda Softworks as well as the Doom videogame franchise. The deal came shortly after Mr. Nadella’s failed bid to buy parts of the popular short-form video app TikTok from Beijing-based ByteDance Ltd.

Microsoft forecast record-breaking sales for the current quarter. But its projection for $13.2 billion to $13.6 billion in revenue for the segment that included its gaming business fell short of Wall Street’s lofty expectations, sending the stock down more than 1.5% in after-hours trading.


Throughout the pandemic, Microsoft has enjoyed a boost to its cloud services, including its workplace-collaboration software package Teams that offers features that compete with Slack Technologies Inc. WORK 0.65% and video-teleconferencing service Zoom Video Communications Inc. ZM 4.09%

Teams, Mr. Nadella said, now has more than 115 million daily active users, up from 75 million daily active users disclosed in April. He added that many of the changes made during the pandemic to how people work are expected to last.

“It’s clear that people will need more flexibility in when, where and how they work,” Mr. Nadella said. “The next decade of economic performance for every business will be defined by the speed of their digital transformation.”

The shift to the cloud is expected to be a continuing focus for companies. Research firm International Data Corporation Tuesday said that by the end of next year it expects 80% of enterprises will put a mechanism in place to shift to cloud-centric infrastructure and applications—a rate twice as fast as before the pandemic.

Strong demand for long-term Azure contracts swelled commercial bookings in the quarter, Microsoft said. They rose 23% year-over-year, far ahead of the 7% and 12% increases the Redmond, Wash.-based company saw in the previous two quarters during the start of the coronavirus pandemic.

Azure is now a bigger source of Microsoft revenue than its iconic Windows software package, said Brent Bracelin, an analyst at Piper Sandler. The company doesn’t break out Azure sales figures.


Sales from commercial cloud, a broader metric of its cloud business, reached $15.2 billion in the most recent quarter, compared with $11.6 billion in the year-ago period.

And with people working from home and many students still stuck learning remotely, laptops and tablets have been selling strongly. Microsoft said sales of its Surface computing devices grew 37%.

“Enterprises are transitioning from Covid-19 triage to starting to renew their digital transformation plans with a focus on hybrid work. Microsoft is taking advantage of this phenomenon,” said Patrick Moorhead, president of the technology-industry analysis firm Moor Insights & Strategy.

The increase in cloud demand hasn’t been pain free, though. Microsoft has at times struggled to keep its cloud services running smoothly. An outage last month resulted in its cloud software tools being inaccessible for hours.

Microsoft also could see its search-engine business, Bing, gain momentum after the Justice Department filed an antitrust case against Alphabet Inc. GOOG 0.87% -owned Google for its practices in search and advertising. Bing has less than 7% market share in the U.S. search-engine market, little changed since it launched in 2009. The Google case, though, is expected to take years to play out. Microsoft’s ad businesses, meanwhile, remains under pressure as companies cut back on spending during the pandemic. Ad sales, the company said, fell 10%.