Four key nuggets from Microsoft's mixed Q3

Tech titan Microsoft saw its top line swell in a quarter that was decidedly a mixed bag for the tech giant.

The COVID-19 pandemic has driven "two years' worth of digital transformation in two months" said CEO Satya Nadella, as the vendor giant reported its Q3 results.

The US giant saw its revenues increase by 15 per cent year-on-year to $35bn (£27.8bn) in its third quarter, beating Wall Street expectations by 3.9 per cent.

Net income was also up 22 per cent year on year to $10.8bn (€9.93bn).

Despite a turbulent time for most on the stock market, investors have reacted favourably, with the company's shares up to the highest level since late February.

With growth across the vendor's three operating segments, CRN's sister publication CPI picked out the top four takeaways from Microsoft's first financials since the coronavirus global lockdown.

1. Teams use skyrockets

It was only last summer that Microsoft said it was shuttering Skype for Business and announced a staggered timeline to replace it with Teams.

Now the vendor's fastest-growing app ever, Teams has had a COVID-19 injection of accelerated adoption.

In an earnings call transcribed by Seeking Alpha, Nadella noted that "the world of remote everything" has led to an explosion in Teams use.

"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 adapt and stay open for business," he said.

As Europe started going into lockdown in March, the number of daily users of Teams skyrocketed by as much as 12 million in a week.

"We saw more than 200 million meeting participants in a single day this month, generating more than 4.1 billion meeting minutes. Teams now has more than 75 million daily active users," Nadella added.

Microsoft claims that COVID-19 has had "a minimal net impact on the total company revenue".

At the start of this month, the vendor announced that it would be making COVID-19 related exceptions for partners. Skills competency extensions on Teams and Azure are being extended into 2021.

2. Azure growth slows

Azure revenue was up by 59 per cent in Q3, which Microsoft said was driven by accelerated growth in the vendor's consumption-based business.

However, the pace of the vendor's cloud growth is slowing.

It was only last quarter that Microsoft logged accelerated Azure growth for first time in two years, when it rose by 62 per cent.

Before then, cloud growth was 59 per cent in Q1 2020.

However, Nadella pointed to expansions in two new regions for the cloud provider this quarter, in Mexico and Spain. 

He also highlighted its March acquisition of 5G specialist Affirmed Networks.

"Now Azure Edge Zones extends Azure to the network edge, connecting directly with carriers' 5G networks to enable immersive, real-time experiences that require ultralow latency. And our acquisition of Affirmed Networks will help operators deploy and maintain 5G networks and services cost effectively and securely," he said.

Azure sits within Microsoft's Intelligent Cloud operating segment - which saw revenues up 27 per cent to $12.3bn. Within it, server products and cloud services sales also grew 30 per cent, while enterprise services went up 6 per cent.

3. SMB slowdown

Chief financial officer Amy Hood highlighted the vendor's SMB market as having been particularly impacted by the coronavirus.

The company's sales expectations changed, especially in verticals most impacted by COVID-19.

"We saw a slowdown in our transactional business across segments, but particularly in small and medium businesses," she said.

"In Enterprise Services, growth rates slowed as consulting projects were delayed."

Despite that, Enterprise Services revenue increased six per cent "as growth in Premier Support Services more than offset the consulting delays".

4. ‘Significant reduction' in ad spending

Microsoft's Productivity and Business Processes segment was up 15 per cent to $11.7 billion.

However within that, despite LinkedIn delivering double digit growth - as it has consistently done since Microsoft's 2016 acquisition - Hood said LinkedIn and Bing were affected by "a significant reduction in advertising spend".

"Annual contracts in LinkedIn's Talent Solutions business, renewals were impacted by the weak job market," she added.

However, she said that it was partially offset by increased demand in its Personal Computing segment for Windows OEM, Surface, Office Consumer, and Gaming. 

That segment as a whole grew three per cent to $13.2bn (€12.14 bn).

In particular, Hood said that OEM, as well as Surface revenue, benefited from Microsoft's China supply chain improving throughout the quarter as well as increased demand from remote scenarios and continued Windows 7 end of support.

In its Q4 outlook, Hood added that Microsoft does not expect ad spend to recover.

"We assume advertising spend levels from March do not improve in Q4, which will impact Search and LinkedIn," she said.

"However, in our consumer business, we expect continued demand across Windows OEM, Surface, and Gaming from the shift to remote work, play, and learn from home.

"Our outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease. 

• Tweet  
• Facebook  
• LinkedIn  
• Send to  

• Topics
• Financial and Reporting
• satya nadella
• Microsoft
• COVID-19
• LinkedIn
• Financial results
• Microsoft Teams
• Azure
• Cloud Computing