M+E Connections

Microsoft’s strong performance in the third quarter (ended March 31) was driven by continued strong Azure and overall global cloud computing demand as more people turned to its Teams communication and collaboration platform and Windows Virtual Desktop service that helped enterprises work remotely during the COVID-19 pandemic.

“We delivered double-digit topline and bottom line growth once again this quarter, driven by the strength of our commercial cloud,” Microsoft CEO Satya Nadella said April 29 on an earnings call.

“As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months,” he told analysts, adding: “From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security – we are working alongside customers every day to help them stay open for business in a world of remote everything. There is both immediate surge demand, and systemic, structural changes across all of our solution areas that will define the way we live and work going forward.”

Total Microsoft revenue grew 15% from a year ago to $35 billion, while profit increased 22% to $10.8 billion ($1.40 a share) from $8.8 billion ($1.14 a share).

Despite the increased teleconferencing and remote work that resulted from the pandemic, COVID-19 itself had “minimal net impact” on total company Q3 revenue, Microsoft said in its earnings announcement.

Azure momentum, after all, had been growing significantly before the coronavirus. Meanwhile, search was “negatively impacted” in Q3 by “reductions in advertising spend, particularly in the industries most impacted by COVID-19,” Microsoft said, adding the “effects of COVID-19 may not be fully reflected in the financial results until future periods.”

However, in Microsoft’s Productivity and Business Processes and Intelligent Cloud segments, cloud usage grew, especially in Microsoft 365 including Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform, “as customers shifted to work and learn from home, Microsoft said.

In the More Personal Computing segment, Windows OEM and Surface were helped by increased demand to “support remote work and learn scenarios, offset in part by supply chain constraints in China that improved late in the quarter,” Microsoft said. “Gaming benefited from increased engagement following stay-at-home guidelines,” it said.

Revenue in Productivity and Business Processes grew 15% to $11.7 billion, with Office Commercial products and cloud services revenue up 13%, driven by Office 365 Commercial revenue growth of 25%, Microsoft said. Office Consumer products and cloud services revenue increased 15%, with Office 365 Consumer subscribers increasing to 39.6 million.

Revenue in Intelligent Cloud jumped 27% $12.3 billion, with server products and cloud services revenue growing 30%, driven by Azure revenue growth of 59%, Microsoft said. Enterprise Services revenue increased a more modest 6%.

Revenue in More Personal Computing inched up 3% to $11 billion, with Windows OEM revenue about flat from a year ago. Windows Commercial products and cloud services revenue increased 17%, while Xbox content and services revenue increased 2% and Surface revenue increased just 1%.

Commercial Cloud gross margin percentage increased 4 points from a year ago to 67%, Microsoft CFO Amy Hood said on the call. “Significant improvement in Azure gross margin percentage, including some benefit from short-term utilization gains as we worked through COVID-19 related supply chain constraints, more than offset sales mix shift to Azure,” she said.

The COVID-19 health crisis is “changing the way our employees, customers, partners, and communities live and work together,” she told analysts, adding: “In the new environment, our team addressed surging usage and remote business process adjustments well.”

“Now more than ever, organizations are relying on Azure to stay up and running, driving increased usage,” Nadella said, noting Microsoft has “more datacenter regions than any other cloud provider – and this quarter we announced new regions in Mexico as well as in Spain.”