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Microsoft predictably profits from remote working surge

If there was ever such a thing as a sure bet, Microsoft benefitting from the COVID-19 enforced lockdown period is as close as you could get.

With a portfolio containing collaboration tools, gaming products and cloud computing services, Microsoft is one the companies which has clearly profited from the digital transformation programmes which have been thrust upon almost every company imaginable, as well as government stay-at-home orders.

“The last five months have made it clear that tech intensity is the key to business resilience,” said CEO Satya Nadella. “Organizations that build their own digital capability will recover faster and emerge from this crisis stronger.”

“Our commercial cloud surpassed $50 billion in annual revenue for the first time this year. And this quarter our Commercial bookings were better than expected, growing 12% year-over-year,” said CFO Amy Hood. “As we drive growth across the company, we remain committed to investing in long-term strategic opportunities.”

Microsoft financial results for quarter ending June 30 (millions) – GAAP
Total revenue $38,033 13%
Operating income $13,407 8%
Net income $11,202 -15%

Although the net income column is less attractive, this includes $450 million charge for the closure of the Microsoft Store physical locations during the three-month period, while it is also misshapen by a net income tax benefit of $2.6 billion for the same quarter for 2019. Looking at the non-GAAP figures, those which are adjusted for anomalies, net income grew by 5%.

While the cloud computing segment will claim the headlines, it is also worth noting the impact of COVID-19 on other business units. Productivity and Business Processes increased thanks to the remote working trends and additional licences purchases, while More Personal Computing segment, Windows OEM, Surface, and Gaming benefited from increased demand to support work-, play-, and learn-from-home scenarios.

On the negative side of the coin, a reduction in advertising spend hurt the search business, while decreased activity in recruitment also affected sales for LinkedIn, though it still realised year-on-year growth of 10%.

Financial performance by business unit for quarter ending June 30
Product/Service Business Unit Year-on-year
Office Commercial PBP 5%
Office Consumer PBP 6%
LinkedIn PBP 10%
Dynamics PBP 13%
Server IC 19%
Enterprise IC 0%
Windows OEM MPC 7%
Windows Commercial MPC 9%
Xbox MPC 65%
Surface MPC 28%
Search MPC -18%

Productivity and Business Processes = PBP, Intelligent Cloud= IC, More Personal Computing = MPC

Despite the majority of the business units surging forward, it is the cloud which is collecting the applause.

“We are seeing businesses accelerate the digitization of every part of their operations from manufacturing to sales and customer service to reimagine how they meet customer needs from curb side pickup and contactless shopping in retail to telemedicine and healthcare,” Nadella said on the earnings call.

“That’s why we are building the full modern technology stack powered by cloud and AI and underpinned by security and compliance to help every organization digitally transform.”

During the last quarter, new data centres were opened in Italy, New Zealand and Poland, while new capabilities were introduced in Azure Stack HCI help customers bring the cloud to their own data centres. The acquisitions of Affirmed Networks and Metaswitch bulks out the company’s edge capabilities for 5G, while the AI services are now available in 49 languages and Codespaces is accelerating the process of code to cloud. The Azure unit grew 47% year-on-year through the period.

The next few months are forecast to see a slowdown, though this is perhaps due to customers taking stock and implementing strategies to take a more long-term approach to the remote working dynamic. Let’s not forget, most organisations were forced through this digital transformation programme at break-neck speed; not every decision will have been the correct one.

In the Productivity and Business Processes, Office Commercial is expected to continue on a positive trend, though this will partly be offset by a decline in the on-premise portfolio and flat grow in Office consumer. Intelligent Cloud expect Azure to continue to lead the charge, while on-premise is forecast to increase slightly and enterprise services remain flat.

Finally in More Personal Computing, the Window OEM is expected to continue to decline, while Windows commercial products and cloud services could report double-digit growth and security offerings in Microsoft 365 is believed to be popular. The team expect growth in the high teens for the Surface portfolio, as products come to the end of their lifecycle, though search will be down once again.

Forecast for next three months (Q1 2021)
Business unit Forecast Q1 2020 comparison
Productivity and Business Processes $11.65 billion – $11.9 billion $11.1 billion
Intelligent Cloud $12.55 billion – $12.8 billion $10.8 billion
More Personal Computing $10.95 billion – $11.35 billion $11.1 billion
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