Microsoft (MSFT) faces minimal impact from COVID-19 in Q3

Despite the turmoil created by the global health crisis, once again Microsoft’s (NASDAQ: MSFT) earnings results excelled the market’s estimates in the third quarter of 2020, helped by the strong growth in Intelligent Cloud and Productivity and Business Processes segments. Demand from work, play, and learn from home scenarios, benefitted Windows OEM, Surface, Office Consumer, and Gaming businesses in the quarter. This was partially offset by a significant reduction in advertising spend, which impacted Search and LinkedIn businesses.

Impacts of COVID-19

In Consumer business, the supply chain in China returned to more normal operations at a faster pace than what Microsoft had anticipated. Commercial business witnessed an increased usage across Windows Virtual Desktop, Power Platform, and Microsoft 365, particularly in Teams and in advanced security solutions. Microsoft witnessed a slowdown in transactional business across segments, but particularly in small and medium businesses. In Enterprise Services, growth rates slowed as consulting projects were delayed. In LinkedIn’s Talent Solutions business, annual contract renewals were impacted by the weak job market.

Some interesting stats from CEO Satya Nadella’s speech:

• Windows 10; more than 1 billion monthly active devices, up 30% year-over-year
• Azure Active Directory, 300 million active users
• Microsoft 365 Personal and Family; more than 39 million subscribers
• GitHub; 50 million developers
• LinkedIn; more than 690 million professionals
• Xbox Live; nearly 90 million active users
• Xbox Game Pass; more than 10 million subscribers

Microsoft Teams

• More than 200 million meeting participants in a single day this month, generating more than 4.1 billion meeting minutes
• More than 75 million daily active users
• In healthcare alone, there were more than 34 million Teams meetings in the past month
• More than 183,000 educational institutions now rely on Teams
• 20 organizations with more than 100,000 employees are now using Teams

Meanwhile, Teams rival Zoom announced earlier that it has 300 million “daily active users” and then changed it as 300 million “daily meeting participants”. Zoom has not revealed its daily active users clearly. Apart from Zoom, Google Meet, Facebook’s video service, and Slack are trying to grab their share in the communication and collaboration platform space.

Outlook

Microsoft usually doesn’t issue the outlook in its earnings press release, but the company provides the outlook during the earnings call. Microsoft expects the continued demand across Windows OEM, Surface, and Gaming in Q4. However, growth might be impacted when the stay-at-home guidelines eased. Advertising spend levels are not expected to improve in Q4, which will impact Search and LinkedIn businesses. In Commercial business, the sales dynamics from March are expected to continue, including a significant impact in LinkedIn from the weak job market and increased volatility in new, longer lead time deal closures.
Capital expenditures are expected to increase sequentially in Q4 to support the growing usage and demand for cloud services.

A stronger US dollar is expected to largely impact the company. Based on current rates, FX is expected to decrease total company, Productivity and Business Processes, and Intelligent Cloud revenue growth by approximately 2 points, and decrease More Personal Computing revenue growth by approximately 1 point.

In Productivity and Business Processes, revenue is expected to be between $11.65 billion and $11.95 billion. In Office commercial, revenue growth will continue to be driven by Office 365, with strong upsell opportunity, particularly advanced security solutions. LinkedIn is expected to have strong engagement. However, LinkedIn revenue is expected to decrease by mid-single digit as a result of lower customer hiring needs and advertising spend.

Intelligent Cloud’s revenue is targeted between $12.9 billion and $13.15 billion for Q4. In Azure, which grew 59% year-over-year in Q3, revenue growth will again be driven by consumption-based business, with continued strong growth across the customer base with some moderation expected in the most impacted industries and segments.

Revenue from More Personal Computing is eyed to be between $11.3 billion and $11.7 billion. Windows OEM revenue growth is expected to be low to mid-single digits and Windows commercial products and cloud services revenue is expected to grow in mid-single digit.

When an analyst asked whether the current environment is a tailwind or headwind for Azure growth and about the potential economic pressure on IT budgets, CEO Satya Nadella said:

Two years from now is there going to be more being done in the public cloud or hybrid cloud or less, the answer is more, just because it is more efficient, it is the only way for you to have even the business continuity required in times like this, and your needs going forward of increasing digitization are going to be met with better pricing, better economics at a unit price level for the given business. Microsoft is not immune from what’s happening broadly in the world in terms of GDP growth. But at the same time, if there is going to be economic activity, then I would claim that digital as a component of that economic activity is going to increase.”

MSFT stock had gained 14% since the beginning of the year, while the S&P 500 Index had dropped 10%. Almost all the analysts have recommended to “Buy” the stock, which has got a price target of $193.29.

Read the full Microsoft’s Q3 2020 earnings call transcript