Jan 25 (Reuters) – Microsoft Corp (MSFT.O) on Tuesday forecast revenue for the current quarter well ahead of Wall Street targets, thanks in part to its Intelligent Cloud unit.

The outlook eased growth concerns sparked by December quarter results, which initially weighed on Microsoft shares in after-hours trading. But the shares reversed course following the outlook, trading 3% above the closing price.

Investors were looking to ensure the enterprise cloud business continued to grow strongly and got it from Microsoft.

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“So the quarter itself was, ho hum. Good, but not as good as what we’ve seen in previous quarters,” Jefferies analyst Brent Thill said. “But then the guidance for the third quarter really turned the tide and saved the Nasdaq, if you will.”

Thill said Microsoft’s indications that Azure revenue would grow sequentially was strong assurance that cloud demand was strong.

Microsoft forecasts Intelligent Cloud revenue of $18.75 billion to $19 billion for its fiscal third quarter, driven by “strong growth” in its Azure platform. That compares to a Wall Street consensus of $18.15 billion, according to Refinitiv data.

Thill said strong cloud computing momentum in favor of Microsoft will likely also be reflected in the upcoming results of rivals Amazon.com Inc and Alphabet Inc (GOOGL.O) Google.

Microsoft also provided strong insights in other areas.

The More Computing unit forecast third-quarter revenue of $14.15 billion to $14.45 billion, ahead of Wall Street’s target of $13.88 billion, and productivity and business processes of $15.6 billion to $15.85 billion versus consensus target of $15.72 billion.

A smartphone is seen in front of the Microsoft logo in this illustration photo taken July 26, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

Operating margins for the full year are expected to be slightly higher than the prior year.

Microsoft’s total second-quarter revenue beat expectations, but Azure’s revenue growth of 46% was only in line with analyst expectations compiled by Visible Alpha. Azure’s growth has shown a steady decline from fiscal 2020, when growth was around 60%.

Microsoft has become one of the world’s most valuable companies by betting heavily on enterprise software and services, particularly its cloud services and the web-to-web move of its Outlook email and calendar software, known as of Office 365, which has benefited from the shift to work and learn from home during the pandemic. Demand for cloud services from Microsoft and rivals Amazon.com and Alphabet has also benefited from the pandemic-fueled shift online.

Revenue from Microsoft’s largest segment, which offers cloud services and includes Azure, its flagship cloud offering, grew 26%, while the business that hosts its Office 365 services grew 19% in the quarter.

Net income rose to $18.77 billion, or $2.48 per share, from $15.46 billion, or $2.03 per share, a year earlier.

The company said its revenue hit $51.73 billion in the three months ended Dec. 31, up from $43.08 billion a year earlier. Analysts on average had expected revenue of $50.88 billion, according to Refinitiv data.

Investors are also focused on Microsoft’s proposed $69 billion acquisition of Activision Blizzard Inc (ATVI.O), announced on January 18, a huge expansion for its games division. It also expands the company’s efforts in what’s called the metaverse, or the merging of the online and offline worlds, which will have enterprise and consumer applications.

Microsoft said the deal with Activision Blizzard would help boost revenue from Xbox content and services. Growth has fallen sharply from its peak in the fourth quarter of fiscal 2020, when Xbox content and services grew 65%. In the last quarter, revenues increased by 10%, whereas in the prior year quarter, they increased by 40%.

“They’ve got a ton of great content and franchises. And that’s where that revenue will end up going when the deal closes, for sure,” said Brett Iversen, general manager of investor relations at Microsoft. , referring to the deal with Activision.

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Reporting by Nivedita Balu in Bengaluru, Jane Lanhee Lee in Oakland, California and Danielle Kaye in New York Editing by Sriraj Kalluvila, Peter Henderson, Matthew Lewis and Leslie Adler

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