Microsoft (MSFT) Q4 2020 earnings: Bright spots and areas of concern

Amid the disruptions caused by COVID-19 across the world, very few companies have reported positive results. Currently, there are four US companies that are with more than $1 billion in market cap. Tech giant Microsoft (NASDAQ: MSFT) is the first company in this list that reported its quarterly earnings in this earnings season. The other companies in this list, including Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and AlphaBet – formerly known as Google (NASDAQ: GOOG/GOOGL) are set to report their quarterly earnings on Thursday, July 30. Let’s look at the bright spots and areas of concern from Microsoft’s Q4 earnings.

Bright spots

Microsoft continued its winning streak of beating consensus estimates in its final quarter of fiscal 2020. Revenue of $38 billion was up 13% with all three business segments registering a growth. Profit of $1.46 per share, which increased 7%, also bettered the market’s view.

The Redmond, Washington-based firm benefited during the COVID period from the ‘work, learn and play from home’ culture that is gaining ground. This trend stimulated an increase in PC purchases in the first half of this calendar year. Also, Microsoft’s cloud service offerings helped work-from-home employees and students.

During the third quarter, Microsoft said that COVID-19 had a minimal net impact on its revenue. Many trends continued in a similar manner in the fourth quarter. Revenue from gaming, Windows OEM, Windows Commercial, Surface and cloud businesses witnessed growth. The company saw a marked increase in the usage of Microsoft Teams. Across the Power platform, usage accelerated and Power Apps monthly active users increased 170% year-over-year in the fourth quarter.

Revenue from More Personal Computing segment, which includes gaming, Windows and Surface businesses, grew 14% year-over-year mainly due to the strength in the gaming business.

Gaming revenue surged 64% in the quarter, primarily driven by Xbox content and services revenue growth of 65%. It’s worth noting that revenue from Xbox content and services was down 3%, flat, down 11% and up 2%, respectively, in the previous four quarters. In yesterday’s Xbox Games Showcase, Microsoft debuted its diverse games line-up, which included 10 world premieres.

Areas of concern

Microsoft usually doesn’t provide exact revenue from Azure, which competes with Amazon’s AWS. The company just gives Azure revenue growth in percentage terms. This is the first quarter, Azure revenue growth came below 50% and the growth has been declining quarter over quarter.

LinkedIn revenue in the fourth quarter increased 10%. The weak job market impacted the annual bookings in Talents Solutions business. Microsoft expects low to mid-single digit revenue growth in LinkedIn primarily from weak bookings and revenue growth in the Talent Solutions business,

Based on current rates, Microsoft expects FX to decrease total company, Productivity and Business Process and Intelligent Cloud revenue growth by approximately 1 point in the first quarter of 2021. Revenue from Windows OEM business is targeted to decline in the low teens in Q1. 

The slower earnings growth in the recently ended quarter and the lighter outlook didn’t go well with investors. Yesterday, Dow dropped 354 points amid the sell-off of tech stocks. Early this week, when Netflix (NFLX) tanked, we warned that there could be a crash in the tech bellwethers.

Digitization

Earlier, digital technology was not considered as an important tool for business resilience. But the situation in the last five months had made companies to accelerate the digitization in every part of their operations. Increasing digitization will help Microsoft in the future.

During the Q4 earnings call, CEO Satya Nadella said,

“Organizations that build their own digital capability will recover faster and emerge from this crisis stronger. That’s why we are building the full modern technology stack powered by cloud and AI and underpinned by security and compliance to help every organization digitally transform.”

Read the entire transcript of Microsoft Q4 2020 earnings call