Microsoft last night met Wall Street's targets for its quarterly results and forecast, though Azure cloud computing sales grew more slowly than a year earlier.
Shares of Microsoft, one of the most valuable US technology companies, fell 3% in extended trade even though earnings per share slightly beat analysts' estimates.
Azure, Microsoft's flagship cloud product, saw revenue growth of 76% in the company's fiscal second quarter ended December 31, down from a 98% surge a year earlier.
Azure sales had increased 76% in the September quarter as well.
Long known for its Windows software, Microsoft has shifted its focus to the fledgling cloud market where it is battling Amazon.com for dominance.
The company is rapidly picking up business from the retail industry in particular, which is aiming to keep pace with the e-commerce business of Amazon.
This month alone, Microsoft announced deals with Walgreens Boots Alliance and Kroger, on top of a five-year agreement with Walmart it unveiled this summer.
"Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare," Microsoft's chief executive Satya Nadella said.
Microsoft forecast revenue of between $29.4 billion and $30.1 billion in the current quarter. Analysts were expecting $29.9 billion, according to IBES data from Refinitiv.
The company also said a stronger US dollar would hit growth of its intelligent cloud business segment, which includes Azure and other products, by 2 percentage points.
Microsoft has long courted customers outside the US and has a 17% share of the global cloud market, research firm Canalys previously said. Amazon has 32%.
The company is spending more on the latest cloud technologies to narrow the gap. Research and development expenses rose to $4.1 billion in the quarter from $3.5 billion a year earlier.
Microsoft said its total revenue climbed 12.3% to $32.47 billion. Wall Street analysts on average had expected revenue of $32.51 billion, according to IBES data from Refinitiv.
Revenue from Microsoft's productivity software unit climbed 13% to $10.1 billion, powered by double-digit revenue growth for LinkedIn and Office 365.
Wall Street analysts on average had expected revenue of $10.09 billion.
Microsoft's personal computing division, home to Windows software and still its largest by revenue, showed revenue growth of 7% to $13 billion, while analysts had expected $13.07 billion.
The unit also includes Xbox gaming consoles, the Bing online search service and Surface laptops.
Microsoft reported a profit of $8.42 billion. Excluding one-time items, it earned $1.10 per share, edging past analysts' estimates of $1.09 per share.