Cloud Services Fuel Microsoft’s FY21 Q2 Revenue Growth

Company reports double-digit growth in all three business segments.

Cloud services fueled Microsoft’s revenue growth for the company’s second quarter of fiscal year 2021. For the period ended December 31, 2020, Microsoft reported total revenue of $43.1 billion, a 17% increase year-over-year. In addition, the technology company reported 13% revenue growth in Productivity and Business Processes, 23% revenue growth in its Intelligent Cloud segment, and 14% growth in its More Personal Computing segment.

CEO comments

In CEO Satya Nadella’s comments on Tuesday’s earnings call, he reiterated a common theme heard on previous earnings calls – Microsoft’s success is due to its role in support companies as they transform their businesses.

Microsoft CEO Satya Nadella

“It was a record quarter driven by our commercial cloud which surpassed $16 billion in revenue up 34% year-over-year. What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth. It’s no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform,” said Satya Nadella, Microsoft CEO, on Tuesday’s earnings call.

“…I’m energized by our increasing momentum and the expanding opportunity fueled by the structural change brought about by the rapid adoption of digital technology. We’re investing to meeting these needs in the coming decade and I’m optimistic about what’s ahead,” Nadella said.

Overall business and financial highlights for FY21 Q2

  • Operating expenses increased 3%.
  • Company employee count grew 10% compared to the same period last year, because Microsoft invested in staff in the areas of customer success, cloud engineering and sales.
  • Cash flow from operations was $12.5 billion, a 17% increase year-over-year.
  • Operating income was $17.9 billion, a 29% increase year-over-year.
  • Net income was $15.5 billion, a 33% increase year-over-year.
  • Diluted earnings per share were $2.03, a 34% increase year-over-year.
  • Microsoft returned $10 billion  to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2021, 18% increase year-over-year.

Highlights in Productivity and Business Processes

  • Revenue was $13.4 billion, a 13% increase year-over-year.
  • Office Commercial products and cloud services revenue grew 11% year-over-year, led by Office 365 Commercial revenue growth of 21% year-over-year.
  • Office Consumer products and cloud services revenue increased 7% year-over-year.
  • Microsoft 365 Consumer now has 47.5 million subscribers, up from 45.3 million at the end of its first quarter of fiscal year 2021.
  • LinkedIn revenue grew 23% year-over-year, higher than company estimates.
  • Dynamics products and cloud services revenue grew 21% year-over-year, led by Dynamics 365 revenue growth of 39% year-over-year.

Highlights in Intelligent Cloud

  • Revenue in this business segment was $14.6 billion, an increase of 23% year-over-year, ahead of expectations.
  • Server products and cloud services revenue grew 26% year-over-year, led by Azure revenue growth of 50% year-over-year.

Highlights in More Personal Computing

  • Revenue in More Personal Computing was $15.1 billion, a 14% year-over-year increase.
  • Windows OEM revenue grew 1%.
  • Windows Commercial products and cloud services revenue grew 10% year-over-year.
  • Xbox content and services revenue increased 40% year-over-year.
  • Gaming revenue increased 51%, exceeding $5 billion for the first time in company history.
  • Xbox hardware revenue grew 86% due in large part to the successful launch of Xbox series X and series S late last year.
  • Xbox Live has more than 100 million monthly active users, and Game Pass has 18 million subscribers.
  • Surface revenue increased 3% year-over-year.
  • Search advertising revenue, excluding traffic acquisition costs, grew 2% year-over-year.

Company guidance for FY21 Q3

CFO Amy Hood provided the following guidance, which does not factor in any impact from the company’s acquisition of ZeniMax which is expected to close by the end of Microsoft’s fiscal year 2021.

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  • On the commercial side, Microsoft will focus on “consistent execution, focus on customer success and a compelling solution portfolio in high growth markets.”
  • On the consumer side, the company expects growth in the PC market and in productivity tools to continue.
  • Based on demand for the Xbox series X and series X, Microsoft expects continued demand and strong engagement.
  • The company estimates Productivity and Business Processes revenue will range between $13.35 billion and $13.6 billion, Intelligent Cloud revenue will range between $14.7 billion and $14.95 billion, and More Personal Computing revenue between $12.3 billion and $12.7 billion.
  • Microsoft expects continued revenue growth in its Office Commercial and Office Consumer products and Microsoft 365 subscription revenue.
  • Estimated cost of goods sold will range between $13.1 billion and $13.3 billion, and operating expenses will be between $11.9 billion and $12 billion.

“In closing, we have executed well in the first half of our fiscal year in a challenging and changing environment. Investments made over quarters and often years coupled with focused execution by our teams are the drivers behind a compelling portfolio that is delivering value today for our customers and creating optimism in our roadmap for tomorrow. Satya discussed our unique, comprehensive and integrated set of products earlier on the call; products and services that span large growth markets and we will continue to invest broadly and boldly against the significant opportunities ahead of us,” Hood said.

Insider take

Microsoft had another solid quarter, posting double-digit increases and estimating continued success in the next quarter. Though their business strategy is largely responsible for the company’s success, the pandemic has also served Microsoft with consumers, businesses, government agencies and educational institutions turning to Microsoft for technological solutions to stay connected, productive, educated and entertained.

The results of this earnings report make last week’s announcement and subsequent reversal of a price hike for its Xbox Live Gold gaming subscription even more puzzling. Xbox content and services revenue increased 40% in this quarter, the biggest growth by percentage, of any other Microsoft product or service, and they hit a revenue record of more than $5 billion for gaming. To then increase the gaming subscription price during a pandemic when gaming has grown in popularity seems greedy.