Microsoft Reports Net Income of $10.8 Billion in Q3 of FY2020

Company says COVID-19 has had aminimal net impact.

On its earnings call yesterday, Microsoft Corp. reported net income of $10.8 billion, a 22% increase year-over-year for its third quarter of fiscal year 2020 which ended March 31, 2020. Diluted earnings per share were $1.40, a 23% increase year-over-year. Microsoft also saw a 15% increase in total revenue of $35.0 billion, and a 25% increase in operating income of $13.0 billion.

“We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security – we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything. Our durable business model, diversified portfolio, and differentiated technology stack position us well for what’s ahead,” said Satya Nadella, Microsoft CEO in an April 29 news release.

“At Microsoft, our focus remains on ensuring the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology and resources to our customers and partners to help them do their best work while remote,” Nadella added.

In its earnings presentation, Microsoft said that COVID-19 had a minimal net impact to the total company. Impacts included the following:

  • Increased cloud usage by remote work via Microsoft 365, Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform
  • Fewer transactional licenses in small and medium businesses
  • Lower ad spending impacting LinkedIn revenue
  • Supply chain constraints in Windows OEM and Surface
  • Increased engagement in Gaming
  • Reduced customer advertising spending, impacting Search revenue, particularly for industries most impacted by the coronavirus
  • Delayed cloud infrastructure spending because of supply chain constraints
  • Reduced discretionary spending in travel and marketing

The company noted in its news release that the financial effects of COVID-19 may not be fully felt until future quarters.

Segment highlights include the following:

Revenue in Productivity and Business Processes

  • Revenue in this segment was $11.7 billion, a 15% increase year-over-year.
  • Office Commercial products and cloud services revenue grew by 15%, drive by Office 365 Commercial revenue growth of 25%.
  • Office Consumer products and cloud services revenue grew 15%.
  • Office 365 consumer now has 39.6 million subscribers.
  • LinkedIn revenue increased 21%; LinkedIn sessions grew 26%.

Revenue in Intelligent Cloud

  • Server products and cloud services revenue increased 30%, driven by Azure revenue growth of 59%.
  • Enterprise Services revenue grew 6%.

Revenue in More Personal Computing

  • Revenue in this segment was $11.0 billion, an increase of 3% year-over-year.
  • Windows OEM revenue was flat.
  • Windows Commercial products and cloud services revenue grew 17%.
  • Search advertising revenue, not including acquisition costs, was up 1%.
  • Xbox content and services revenue increased 2%.
  • Surface revenue grew 1%.

Other financial highlights include the following:

  • Microsoft returned $9.9 billion to shareholders through share repurchases and dividends, a 33% increase year-over-year.
  • Operating expenses were $11.0 billion, a 10% increase year-over-year, due to investments in cloud engineering and LinkedIn.
  • Cash flow from operations was $17.5 billion, an increase of 29% year-over-year.

“In this dynamic environment, our sales teams and partners executed a solid third quarter, with Commercial Cloud revenue generating $13.3 billion, up 39% year over year,” said Amy Hood, executive vice president and CFO. “We remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth.”

As of 7:59 p.m. Eastern Daylight Time yesterday, Microsoft stock was up, closing at $177.43, up from $169.81 on April 28, 2020. The company’s 52-week high is $190.70.

Microsoft stock rises to $177.43 at close on April 29, 2020.
Source: Google

Insider Take:

While so many businesses have been severely impacted by COVID-19, it makes sense that Microsoft would weather the storm, given its range of products. People who are working from home need technology tools to be able to connect to their offices and customers. People who are home because they have been laid off are likely on LinkedIn looking for jobs, while those needing some entertainment are relying on their Xboxes for a little gaming fun. Microsoft is in a better position than most. Its investors apparently agree.