Microsoft: Pre-COVID spending levels are coming back, leading to Azure, Windows growth

Microsoft turned in strong results across just about every part of its business in Q2 FY'21, thanks to spending growth across its customer base.

The COVID-19 pandemic is far from over. But Microsoft is saying that many of its customers are back to pre-COVID levels of investment. And that "V-shaped recovery" helped fuel the company's strong Q2 FY'21 earnings, reported on Jan. 26.

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The company reported second quarter net income of $15.5 billion, or $2.03 a share, on revenue of $43.1 billion, up 17% from a year ago. Wall Street was expecting Microsoft to report second quarter earnings of $40.18 billion with earnings of $1.64 a share.

During the pandemic, Microsoft and other cloud-centric vendors have benefitted from work-from-home scenarios and the acceleration by some customers of their move to the cloud. Microsoft 365, Azure, and Microsoft services running on Azure, gaming, and even Windows PCs all grew during COVID, once customers got their new world orders in order.

Microsoft doesn't break out the dollar values of some of its key business segments, like Azure and Windows. But officials did say Azure revenues were up 50%, year-over-year. And Windows consumer and commercial were solid in Q2, according to Microsoft's General Manager of Investor Relations Mike Spencer.

Spencer noted that Azure growth had slowed a bit during Microsoft's fourth fiscal quarter, which ended in June 2020. It declined somewhat less in Q1 FY'21, he said. But it definitely "climbed back up" in Q2 FY'21, which ended on December 31, 2020.

"Companies have gotten back to pre-COVID on the roadmap," he said when I asked about Azure's 50% growth rate.

The Windows non-Pro OEM business -- Windows licensed for use in home and education PCs -- was strong again this quarter, as it was in Q1 FY'21. But even the Pro OEM business "only" down nine% this quarter, Spencer noted, flying in the face of Microsoft's guidance last quarter that it might be off as much as 20%. Spencer also attributed this to company spending rising. And that increase includes spending by small and mid-size business segment that was hit especially hard by the pandemic.

(Speaking of Azure and Windows, is there any truth to claims by at least one Wall Street analyst that Azure is a bigger business than Windows, revenue-wise? It's impossible to prove that using the financial numbers that Microsoft discloses, but doing some rough math based on Microsoft's latest 10-Q, it definitely seems possible, if not likely.)

Just about every Microsoft business had strong results in Q2. Gaming is now more than a $5 billion business for Microsoft and both gaming hardware and services/content contributed significantly to the company's bottom line. The Surface business broke the $2 billion mark for the first time for the quarter. In spite of the push to the cloud, server products were up four% year-over-year, as well, which officials attributed to Microsoft's hybrid emphasis.

Going into the next quarter, Microsoft is projecting that sales will continue to be strong, especially in regards to consumption of its commercial cloud and consumer services like gaming. Microsoft Chief Financial Officer Amy Hood did say supply constraints of Microsoft's new Xbox gaming consoles likely will continue through the next quarter, however.