Cloud and Digital Acceleration Drive Microsoft Earnings

The year of digital transformation on steroids, driven by the global COVID-19 pandemic, has been good for Microsoft Corporation (MSFT). So good, in fact, that the cloud computing platform Azure has grown to 17% of Microsoft's revenue, up from 4% three years ago, to eclipse its Windows revenues. This constitutes an "important milestone" pointed out by Piper Sandler's managing director and senior researcher Brent Bracelin during Microsoft's earnings call on Oct. 27.

Strong growth in the cloud computing services in the quarter ending on Sept. 30 highlighted increased prominence of the tech giant's cloud services and its ambitious plans for the future. Commercial cloud revenue grew 31% to $15.2 billion compared to a year before.

Microsoft reported total revenue of $37.2 billion for the quarter, a 12% increase. Its net income jumped 30% to $13.9 billion during the same time period. Microsoft's revenues from the Intelligent Cloud segment, which utilizes artificial intelligence (AI) technology, also grew 20% to $13 billion.

Notably, Windows original equipment manufacturer (OEM) revenue declined 5% in the same quarter compared to the year before. Windows OEM Pro revenue dropped 22% driven by lower commercial demand, which is the "worst drop since Microsoft began reporting under its new segments" as pointed out by the Wall Street Journal.

"We're off to a strong start in fiscal 2021, driven by the continued strength of our commercial cloud," acknowledged Microsoft CEO Satya Nadella on the earnings call with Wall Street analysts on Tuesday. "The next decade of economic performance for every business will be defined by the speed of their digital transformation."

Microsoft's CEO touted plans for Azure "as the world's computer with more data center regions than any other provider." Microsoft now has 66 data centers globally. "We're expanding our hybrid capabilities, so that organizations can seamlessly build, manage, and deploy their applications anywhere," Nadella said.

Many analysts are projecting further cloud business growth due to prolonged work-from-home environments. "In many cases we are seeing enterprises accelerate their digital transformation and cloud strategy with Microsoft by 6 to 12 months as the prospects of a heavy remote workforce for the foreseeable future now looks in the cards with this COVID-19 backdrop," Wedbush analyst Dan Ives projected in a research note cited by Yahoo Finance.

Microsoft itself estimates that it is still in the "early innings" of cloud computing growth, according to the CEO. "The way I think about the computing landscape going forward is if you sort of said at the highest of levels today as a percentage of GDP, tech spend is 5%. We think it will double in the next 10 years," Nadella told analysts on the call. "And if anything, this pandemic perhaps has accelerated that doubling."

Other areas of Microsoft's business also fared well in the pandemic era. LinkedIn revenue increased 16%, driven by ad revenue, with a "million hours of content" watched each week, more than double the amount from a year ago according to the company. Gaming is also an increasing important sector for Microsoft, with Xbox content and services revenue growing 30%.

A landmark quarter for Microsoft has made one thing clear: the company whose logo and reputation rely heavily on Windows is increasingly looking to the cloud services, productivity, and gaming as its future engine of growth.

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