In February, Microsoft said it expected to see a decline in Windows revenue because of the COVID-19 pandemic. In March, CEO Satya Nadella suggested despite that prediction, the company would emerge “pretty strong” from the virus outbreak. It seems Nadella was correct, and Microsoft continues to thrive in a COVID-19 world.
For its third quarter earnings, Microsoft announced revenue of $35 billion and income of $10.8 billion. Revenue jumped 15% year-on-year and once again bested Wall Street predictions, which pointed to $33.66 billion in revenue.
It is worth noting the results are until March 30, so how Microsoft does in its fiscal fourth quarter may provide a better understanding of how the company manages during COVID-19. However, it seems Nadella's prediction Microsoft was well placed to ride out the virus seems true.
Commercial cloud was the big winner again, but Xbox has also enjoyed substantial growth. Microsoft's position as a services provider on the cloud has allowed it to maintain customers and gain new users during the pandemic. Nadella pointed this out in the earnings call.
He said Microsoft has “seen two years' worth of digital transformation in two months” and admitted the affects of COVID-19 “may not be fully reflected in the financial results until future periods.”
“As COVID-19 impacts every aspect of our work and life, we have seen 2 years' worth of digital transformation in 2 months. From remote teamwork and 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.”
Commercial Cloud Growth
Looking at commercial cloud, Microsoft saw a 39% increase from last year, adding up to $13.3 billion revenue. Nadella gave an update on Microsoft Teams continued growth. In early March, the service saw its user base increase from around 20 million daily users to 44 million. Now, Microsoft Teams has 75 million active daily users and the needle continues to point upwards.
Office 365 is seeing a similar growth in adoption. Nadella pointed to 258 million paid seats. Furthermore, Microsoft saw a three-fold gain in Windows virtual desktop use during the last quarter.
Product Line Results
- Microsoft Dynamics grew 17% YoY and the Product and Business Processes division increased 15% with revenue of $11.7 billion.
- Azure revenue jumped 59% as part of the wider Intelligent Cloud division's $12.3 billion revenue (+27%)
- The increase in Office 365 use allows revenue to grow 25%.
- More Personal Computing, which include Windows, was up 35% with $11 billion revenue.
- Microsoft's Surface division was a mixed bag. The company says demand was strong, but Chinese supply contstraints in the COVID-19 lockdown limited growth to 1%.
Microsoft's Xbox division has been one of the big winners for the company during the COVID-19 pandemic. So-much-so, Microsoft broke a recent tradition of not offering a detailed breakdown of the division to discuss its success last quarter.
Nadella confirmed Xbox Live subscriptions grew to almost 90 million during Q3. It seems COVID-19 has allowed more people to sign up for the service. Back in FY19 Q4, it was predicted Xbox Live had 65 million users. If true, the service has added 25 million users in 9 months. It would seem a majority of those new users joined in the last 2 months.
Of course, the Xbox One generation is coming to an end and the Xbox Series X will launch this year. With that in mind, hardware console sales are not growing, and the Xbox division is being propped up by services.
For example, Xbox Game Pass now has over 10 million subscribers. This is the first confirmation Microsoft has offered on Game Pass users, suggesting growth has surged in recent weeks. Despite the lack of console sales, it seems the Xbox content and services division increased 2% in the last quarter.