Microsoft beat Wall Street's estimates for its quarterly revenues and earnings, thanks to a slight increase in the growth of its cloud business
Microsoft released Tuesday its financial results for the first quarter of fiscal year 2021, which ended September 30, 2020. Microsoft beat Wall Street's estimates for its quarterly revenues and earnings, thanks to a slight increase in the growth of its flagship business, Cloud Computing. The software company also continues to benefit from a global shift towards home-based work and e-learning. Revenues for the first quarter were $37.2 billion compared to an estimated $35.7 billion.
The pandemic has accelerated an already ongoing shift to cloud computing, helping companies such as Microsoft, Amazon AWS' Cloud Computing unit and Google Cloud from Alphabet. For Microsoft, the health crisis has also boosted demand for its Windows operating systems for laptops and Xbox gaming services as families work, learn and play at home, resulting in profits about 30 percent higher than expected.
"It was another healthy quarter, with continued demand for remote offerings continuing to drive results," said Amy Hood, chief financial officer of Microsoft, in an interview with Reuters.
According to Microsoft, revenues for Azure, its flagship cloud computing service, grew 48 percent, up from 47 percent in the previous quarter. This figure exceeded Wall Street's estimate of 43.45 percent, according to Visible Alpha consensus data. Hood said the increase was due to "an increase in larger, long-term Azure contracts.
Microsoft has decided to sell many of its products through recurring subscriptions, which is very suitable for investors. Indeed, this generates stable revenue streams. The value of Microsoft's future recurring revenue contracts with large enterprises remained stable compared to the previous quarter and the proportion of one-time contracts increased slightly after two quarters of growth, according to the results.
"The next decade of economic performance for every company will be defined by the speed of their digital transformation. We are innovating across our entire range of modern technologies to help our customers in all industries improve their time to value, increase their agility and reduce their costs." said Satya Nadella, CEO of Microsoft.
Microsoft bundles several sets of software and services such as Office and Azure into a "Commercial Cloud" that investors are closely monitoring to assess the company's progress in selling to large enterprises. Gross margins in Microsoft's "Commercial Cloud" reached 71%, up from 66% a year earlier, according to Microsoft.
According to Hood, while this increase can be explained in part by a change in accounting rules for Microsoft servers, these better margins are also due to sales of lucrative software such as Dynamics 365, which competes with Salesforce. "The 38 percent revenue growth in Dynamics 365 was better than we thought and quite good," said Hood.
In other points about the cloud business, Microsoft said 93 percent of the industry's commercial products were sold as subscriptions, up from 94 percent in the previous quarter. The company's remaining performance obligations - a measure of the amount of revenue that has been accrued for the future in sales contracts but not yet formally recognized as revenue - were flat at $107 billion in the first fiscal quarter, but increased from $86 billion a year earlier.
For the Smart Cloud segment, revenues increased 20 percent to $13 billion in the first quarter. Analysts had forecasted revenues of $12.7 billion for this segment, according to Refinitiv's IBES data.
"Demand for our Cloud Computing offerings led to a strong start to the fiscal year with our commercial revenues of $15.2 billion, up 31 percent year-over-year. We continue to invest based on the significant opportunity to drive long-term growth. said Hood.
Some other highlights of Microsoft's results
Hardware revenues were down 27% from the prior year due to lower sales of XB1S/X. Microsoft credits Xbox and Surface as the two drivers of the $4.75 billion in profits from the "More Personal Computing" division.
Increased revenues from Windows products
Revenues from Windows Commercial products and Cloud Computing services increased by 13%, largely due to increased interest in Microsoft 365. In total, the Windows segment of "More Personal Computing" reached $11.8 billion, a 6% increase over the previous year, and operating revenues reached $4.75 billion, an 18% increase, due in part to a reduction in advertising spending.
Surface line sales up
On the other hand, Bing Search recorded a decrease of 10% in the first quarter. Microsoft explains this contraction by the reduction in advertising expenditure due to the current economic crisis linked to the pandemic.
It should be noted that Microsoft's earnings per share in the first quarter were $1.82 compared to an estimate of $1.54. Operating income was $15.9 billion and increased by 25%. Net income was $13.9 billion, representing an increase of 30%.
Microsoft also reported on the use of its workplace collaborative communication application. Just 6 months ago, Microsoft announced that Microsoft Teams had 75 million active users per day. As the global pandemic continues to keep some workers at a distance, Microsoft announced Tuesday in its call for payouts that Microsoft Teams now has 115 million daily active users, with 30 billion minutes of collaboration per day.
Although the growth is spectacular, it is not certain that this is enough to catch up with the market leader in video conferencing, Zoom, although a growing number of companies are standardizing the Teams application, which is often associated with Microsoft 365.