Microsoft Q3 strong as remote work propels Teams, Office 365, Azure

Commercial cloud revenue was $13.3 billion, up 39% from a year ago.

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Microsoft crushed expectations for its third quarter as the company saw strong demand among its cloud services. Commercial cloud revenue was $13.3 billion, up 39% from a year ago.

The company reported third quarter net income of $10.8 billion, or $1.40 a share, on revenue of $35 billion, up 15%.

Wall Street was expecting Microsoft to report third quarter earnings of $1.26 a share on revenue of $33.66 billion.

Microsoft now at 75 million daily active Teams users despite supply chain constraints affecting its cloud business  

CEO Satya Nadella said Microsoft saw strong demand since the company is enabling of remote work, learning and cloud infrastructure. He said that Microsoft has "seen two years' worth of digital transformation in two months."

Simply put, Microsoft saw minimal impact from the COVID-19 pandemic, but the company did note that the full effects "may not be fully reflected in the financial results until future periods."

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The demand picture for Microsoft was strong across product lines such as Teams, Azure and Windows Virtual Desktop. Windows revenue and Surface sales also did well. All those products enable remote work. Microsoft did note that it saw a slowdown in SMB licensing and LinkedIn advertising in the last few weeks of the quarter.

On an earnings call with analysts, Nadella made the following points:

  • "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."
  • Teams has seen more than 200 million meeting participants in a single day in April. Teams also has more than 75 million daily active users.
  • Office 365 has 258 million paid seats. Usage of Windows virtual desktop tripled in the third quarter.

CFO Amy Hood added that the supply chain in China bounced back faster than anticipated. Hood said that the consumer business will see some COVID-19 impact due to advertising and LinkedIn, but Surface and gaming is benefiting. The commercial business is all about cloud demand.

Hood said:

Our focus remains on strategically managing the company for the long term, with decisions optimized for delivering greater customer value and long-term financial growth and profitability. With that, we'll continue to provide increased support to our customers and partners as they navigate the uncertain future ahead, deepening our engagement and adding increased value. We will continue to aggressively expand our cloud infrastructure to support not only the usage surges of today but the growing customer demand for our unique and differentiated cloud offerings in the future.

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By product line and division for the third quarter:

  • Azure revenue was up 59% to help the Intelligent Cloud unit deliver revenue of $12.3 billion, up 27%.
  • Dynamics revenue was up 17% top help propel the Product and Business Processes unit to sales of $11.7 billion, up 15% from a year ago.
  • Office 365 commercial revenue growth was 25%.
  • More Personal Computing had revenue of $11 billion, up 35 from a year ago. Windows commercial products and cloud services revenue fared best.
  • Microsoft said Surface revenue was up 1% due to strong demand, but offset by supply chain constraints in China. 
  • Search advertising was up 1%, but saw reduced spending by industries impacted by COVID-19. 
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