Demand for Microsoft's cloud services helped propel the company to strong Q3 FY2020 earnings. But supply chain constraints for some server components powering its datacenters impacted its cloud infrastructure spending during the quarter.
Microsoft officials emphasized during its third-quarter earnings call that impact from the COVID-19 coronavirus pandemic was not severe during the first two months of the quarter, which ran from January to March, 2020. There was a slow down in the company's transactional business, which is largely a small- and mid-size business thing, and a slowdown in ad spending, which affected LinkedIn. But these were offset by growth in Microsoft 365, Azure, Windows Virtual Desktop, gaming and even on-premises products like Windows Server and SQL Server.
As of April 29, Microsoft's Teams group-chat platform is now at 75 million daily active users, up from 44 million in mid-March. And Office 365 commercial is now at more than 258 million paid seats, officials said. Office 365 consumer subscribers currently are at 36.9 million.
Microsoft's supply chain is based primarily in Asia. In late February 2020, officials warned that supply chain issues might impact its Windows and Surface business, but later, officials said that supply chain recovered quicker than expected. But the supply chain for the server components needed for datacenter servers resulted in "delayed cloud infrastructure spend" in the quarter. Microsoft officials have been designing and open sourcing their own datacenter infrastructure components for years, but still do externally source many datacenter components.
As Microsoft noted in its latest 10-Q: "We acquire some device and datacenter components from sole suppliers. Our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us."
It's worth noting that Microsoft has had to throttle some of its cloud services, prioritize healthcare and first responder workloads and has implemented other steps in its quest to insure cloud business continuity. Yet a number of its cloud customers, and specifically its Azure ones, have been reporting that they've been hitting service constraints. Officials have been saying for months that they know they need to increase Azure capacity, but haven't provided any real details as to when and how this will occur.
Microsoft Chief Financial Officer Amy Hood told analyst call participants during the call that they should expect a "material sequential increase in capital expenditures for cloud services" during the company's fourth fiscal quarter, which runs from April to June. Hood said things got a lot better in March in terms of capex datacenter spending and is expecting it to improve further in the coming months. (This is quite different from what Google said during its latest earnings call, where officials said they planned to recalibrate the pace and focus of datacenter spending.)
Hood said she expects existing trends to continue in Microsoft's Q4. Its advertising business isn't going to improve, which will affect search and LinkedIn. SMB business will continue to be weak, as well. But demand for its cloud services like Azure, Microsoft 365/Office 365, gaming services and Dynamics 365, will likely stay strong as remote working and learning continues, she said.
Microsoft reported on April 29 net income for Q3 of 10.8 billion, or $1.40 a share, on revenue of $35 billion. Its commercial cloud revenue hit $13.3 billion, up 39% from a year ago.