- Microsoft reported strong financial results for the most recent quarter, despite the international public health crisis caused by the coronavirus.
- The company said the pandemic had a “minimal impact” to the overall business in the quarter, but detailed some of the changes it caused including a surge in cloud usage and supply chain constraints that delayed its ability to expand cloud infrastructure.
- Microsoft explained the coronavirus crisis will likely boost its consumer and cloud businesses: “As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months,” CEO Satya Nadella said.
- But the situation could cause more challenges in some of Microsoft’s commercial businesses, including a slowdown in small and medium businesses buying on-premises licenses.
- Microsoft also plans to increase spending on expanding its cloud infrastructure, which will help the company solve the cloud capacity issues it has faced during the crisis.
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Microsoft’s business selling products to companies was expected to get a big boost as the coronavirus crisis forced a sudden shift to remote work, but a recent earnings report revealed even its consumer business benefitted despite challenges to the company’s supply chain.
Microsoft CEO Satya Nadella on its regular post-earnings report call with Wall Street analysts call said the pandemic has caused companies and consumers to adopt its technology at an unprecedented rate — and that while Microsoft is not immune to an economic crisis, as long as people are spending on digital products, the company has firm footing.
“As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months,” Nadella said.
Microsoft released third-quarter earnings on Wednesday, beating analyst expectations as it reported $35 billion in revenue and $10.8 billion in net income.
Microsoft in its earnings report detailed the ways the coronavirus crisis has impacted the company so far — specifically, how it had a “minimal impact,” in the company’s words — and Nadella and Microsoft Chief Financial Officer Amy Hood explained on the call how it expects to fare in the future.
A surge in cloud users, but some slowdowns in commercial sales
Microsoft said the coronavirus crisis caused unprecedented surges in cloud users, including those who use its Microsoft 365 bundles of subscription cloud software including its Teams chat app. Microsoft Teams daily active users, for example, climbed to 75 million, up from 44 million last month.
The crisis did, however, put pressure on Microsoft’s business in other ways.
Sales to customers who buy one-off licenses — such as the on-premise version of Microsoft Office, rather than the subscription-based Office 365 — slowed, particularly among small and medium business customers. Growth also slowed for Microsoft’s Enterprise Services business, which advises customers on how to use Microsoft products to solve business problems, because of delays to consulting projects. Hood said that she expects these sales challenges could continue in the current quarter.
Microsoft faced cloud capacity issues during the crisis as demand for its cloud services increased. Microsoft said supply chain issues in China delayed its spending on expanding cloud infrastructure, which contributed to those capacity issues. Nadella said the supply chain issues have “largely worked themselves out” and Hood said Microsoft will spend “to get ahead of the surge demand” in its cloud business.
Asked whether the pandemic is likely to drive enough Microsoft’s cloud business to overcome any potential slowdowns in IT spends, Nadella said Microsoft is playing the long game.
“If you step back and ask yourself, say, two years from now, ‘Is there going to be more being done in the public cloud or hybrid cloud or less?'” Nadella said. “The answer is more, just because it is more efficient, it is the only way for you to have even the business continuity required in times like this.”
A boost to Microsoft’s consumer business, except for LinkedIn
Microsoft in February said it would miss its sales forecast for the segment of its business that includes revenue from licensing Windows to PC manufacturers, citing issues with its supply chain and “uncertainty related to the public health situation in China.”
Those supply chain issues started to resolve earlier than the company expected, Hood said, and the crisis gave a boost to Microsoft’s consumer business, including licensing Windows to PC manufacturers, Surface devices, and gaming, as more people stayed home. Hood expects that to continue into the current quarter, but growth could slow if stay-at-home guidelines ease.
Analyst Patrick Moorhead of Moor Insights & Strategies, however, said the supply chain constraints likely hurt sales of Microsoft Surface devices.
“The biggest missed opportunity was in Surface where demand was huge, the channel inventory was depleted, and supply chain constraints reduced finished goods output,” he said. Microsoft could have seen as much as 20 percent more in Surface sales without the supply chain constraints, Moorhead estimates.
Meanwhile, Microsoft’s LinkedIn professional social network subsidiary faced challenges related to the economic crisis caused by the pandemic. There was “significant reduction” in advertsing spending for LinkedIn and Microsoft’s search business, Hood said.
LinkedIn had fewer renewals for annual contracts in its Talent Solutions recruiting business, which Hood said was due to a weak job market. Hood expects LinkedIn’s challenges to continue, despite what she expects will be strong engagement on the platform, and cause a “significant” slowdown in revenue growth.
Hood said usuage is increasing not just in cloud services, but across products including Windows and PC.
“And that breadth, in a moment and a period like this, all the pieces are important to value long term here to a company being able to transition through … this initial phase of almost emergency response to a hybrid phase to ultimately what I think we all believe is a very different way and a long-term way of working and collaborating together and driving a digital economy,” Hood said.
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