Microsoft sails through Q3 as cloud revenue tops $13.3B

Microsoft sails through Q3 as cloud revenue tops $13.3B

Vendor benefited from strong demand for its Teams collaboration software during COVID-19 pandemic

Satya Nadella (CEO - Microsoft)

Satya Nadella (CEO - Microsoft)

Credit: Microsoft

Microsoft beat Wall Street sales and profit expectations, powered by sharp demand for its Teams chat and online meeting app and Xbox gaming services as the world shifted to working and playing from home because of the novel coronavirus pandemic.

The company's shares, which have risen over 12 per cent this year, were up about 5 per cent in extended trading.

The results reflect CEO Satya Nadella's focus over his six-year tenure on cloud computing, in which companies tap Microsoft's data centre for computing power - a growing business dominated by Amazon's Amazon Web Services.

The results benefited from sales of its Windows operating system and Surface hardware devices as people upgraded personal computers to work from home. In addition to consumers tapping laptops for school or work, Microsoft also said it saw all-time-high engagement on its Xbox Live gaming service, with 19 million active users.

Microsoft benefited from strong demand for its Teams collaboration software, which Nadella said on a conference call now has 75 million users and competes with Zoom Video Communications and Slack Technologies.

The influx of demand strained Microsoft's data centres, forcing it to limit how much computing new cloud customers could use and to prioritise healthcare and government customers.

In an interview, Microsoft CFO Amy Hood said some of the increased Teams usage came from customers with access to the software as part of a broader subscription and turned it on for the first time. In other cases, Hood said, Microsoft offered Teams in a free trial to large customers.

"In those instances, you also won't see revenue, but seeing great usage obviously is terrific for us longer term if people want to convert that to a paying seat," Hood said. "While I'm really excited about the long-term potential for revenue, you won't see it in this (fiscal third) quarter, or really even in Q4. It's more about people being more and more engaged with Microsoft products."

Microsoft sales were helped by demand for cloud services. However, growth in Azure slowed to 59 per cent from 62 per cent in the second quarter, which company officials said was a result of how large the business has become.

Microsoft said revenue for its "commercial cloud," a combination of Azure and the cloud-based versions of software such as Office, rose 39 per cent to $13.3 billion.

The business' gross profit margin, a key measure of cloud profitability that Microsoft has told investors it expects to improve, was 67 per cent versus 63 per cent last year.

Microsoft also said capital expenditure was $3.9 billion, up from $3.4 billion a year earlier and less than the $4.5 billion the previous quarter. However, Hood told Reuters that supply chain constraints due to the coronavirus pandemic had delayed some spending to build Azure data centres, which will likely be higher next quarter as the company works to catch up.

Microsoft said revenue in its Intelligent Cloud segment, which includes Azure, rose 27 per cent to $12.28 billion, beating analysts' consensus estimate of $11.87 billion according to IBES data from Refinitiv.

Revenue rose 15 per cent to $35.02 billion in the third quarter ending March 31, beating estimates of $33.66 billion. Net income rose to $10.75 billion, or $1.40 per share, from $8.81 billion, or $1.14 per share, a year earlier.

(Reporting by Ayanti Bera in Bengaluru and Stephen Nellis in San Francisco; Editing by Shounak Dasgupta and Richard Chang)

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