Microsoft Q4 earnings: Softening small/mid-size business demand has an impact

Microsoft was still signing large, multi-year Azure deals in Q4 2020, but lower SMB sales affected demand for Windows, Office, and other products.
Written by Mary Jo Foley, Senior Contributing Editor

The ongoing strength of Microsoft's commercial cloud business in its Q4 FY20 wasn't surprising. But the impact of the ongoing COVID-19 coronavirus pandemic on small/mid-size (SMB) businesses is affecting Microsoft's overall business.

That effect wasn't enough to stop the company from posting a strong Q4 with revenues of $38 billion and $1.46 per share. Its "commercial cloud" metric -- which combines Azure, Office 365, Dynamics 365, some of LinkedIn's revenues and other cloud services -- was $14.3 billion for the quarter, up 30% from the same quarter a year ago. Microsoft surpassed $50 billion in commercial cloud revenues for the first time in fiscal 2020, officials said.

However, Microsoft is seeing several SMBs that are struggling. Some aren't spending on IT purchases and others are not even operating, officials said. But slower SMB demand is being offset by spending by larger companies on both cloud services and on-premises software which is part of their hybrid-computing plans, officials said during the company's Q4 analyst call on July 22.

Azure revenues were up 47% based on some undisclosed base number in Q4. A year ago, this percentage was 64%. (This doesn't necessarily mean Azure revenues are slowing, as the base upon which the percentage is calculated is growing.) Microsoft officials said the company had signed a substantial number of large multi-year deals in the quarter. Microsoft's capital expense spending was a hefty $5.8 billion this quarter, following last quarter's much lighter cloud capex spending due to supply chain problems which affected Microsoft's ability to source datacenter components.

In Q4, Windows OEM Pro revenues were down 4% this quarter, compared to Q4 a year ago because of weakness in the SMB segment, officials said. But Windows OEM Non-Pro revenues were up 34% this quarter. Normally, Non-Pro revenues are substantially softer. But it seems consumers and business users were content to buy less expensive Windows PCs via retail channels to meet their work/play-from-home needs.

A slowdown in transactional licensing by SMBs of Office business products contributed to a decline in Office commercial products of 34% in the quarter, officials said. Office commercial products and cloud services growth was 5%, compared to 14% in the same year-ago quarter.

Officials said the user base for the priciest Office 365 SKU (E5) doubled in Q4 year-over-year. Officials did not provide an updated number for Microsoft Teams daily active users beyond the 75 million they cited in April. (I asked if this had anything to do with Slack filing an antitrust complaint against Microsoft in the EU today, but Mike Spencer, the General Manager of Investor Relations, said that was not the case.)

On the analyst call, Microsoft CEO Satya Nadella did note that 69 organizations now have more than 100,000 users of Teams, and 18,00 organizations have more than 10,000 users of Teams.

Microsoft's operating expenses for the fourth quarter were $12.3 billion, up 13% year over year due in part to a $450 million charge for closing Microsoft physical store locations and "an increase in bad debt expense." Officials also said they'll be changing their accounting by raising the useful life of server equipment to four years, which will provide an estimated $2.7 billion benefit in fiscal 2021.

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