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The Coronavirus Crisis Is Lighting a Fire Under Microsoft’s Cloud Business

By Leo Sun - Apr 3, 2020 at 10:02AM

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Surging usage of cloud-based services could offset the weakness of Microsoft's Windows and Surface businesses.

Microsoft (MSFT 2.43%) recently revealed that lockdown measures in Italy sparked a 775% jump in Teams' calling and meeting users in a single month. It also saw a "significant spike" in Teams usage, with over 44 million daily users worldwide spending over 900 million meeting and calling minutes on the platform in a single week.

Microsoft also noted that usage of Windows Virtual Desktop, which allows users to remotely access cloud-based Windows 10 sessions, more than tripled. Government usage of its analytics service Power BI also surged 42% in a week as it was used to share visualized COVID-19 data with the public.

Microsoft also stated that it would prioritize cloud access for first responders, emergency services, and medical software. Microsoft also announced that usage of Skype rose 70% in March and that the platform now had 40 million daily active users. Those figures all suggest the crisis is lighting a fire under Microsoft's cloud business, and it could offset the macro pressures on its other businesses. 

Microsoft's campus in Redmond.

Image source: Microsoft.

Understanding Microsoft's cloud business

Microsoft's commercial cloud revenue rose 39% annually to $12.5 billion, or 34% of its top line, last quarter. Office 365, Dynamics 365, and Azure are the three main pillars of the business.

A network of cloud computing connections.

Image source: Getty Images.

Azure, the cloud infrastructure platform that competes against Amazon (AMZN 3.53%) Web Services (AWS), is its fastest-growing unit. Azure's revenue rose 62% annually last quarter, but Microsoft didn't disclose its exact revenue.

Office 365's revenue rose 27% as consumers and companies migrated toward cloud-based productivity services. Dynamics 365's revenue climbed 42% as more companies accessed its cloud-based customer relationship management (CRM) services. In short, Microsoft's cloud business was firing on all cylinders prior to the COVID-19 pandemic.

Microsoft's "commercial cloud" revenue is actually split across different reporting segments. Teams and Skype for Business are both included in Microsoft's Productivity and Business Processes unit, which also includes Office, LinkedIn, and Dynamics. The unit generated 32% of Microsoft's revenue last quarter.

Virtual Desktop, Power BI, and Azure are all parts of its Intelligent Cloud business, which also includes server products, GitHub, and various enterprise services. The unit accounted for another 32% of its revenue.

What was Microsoft's response to COVID-19?

In late February, Microsoft pulled its third-quarter guidance for its More Personal Computing segment, which generated 36% of its revenue last quarter. It originally anticipated 0%-4% annual revenue growth.

That business sells Windows licenses, hardware devices (including Surface), Xbox consoles and search-based ads. Microsoft noted the COVID-19 outbreak had impacted the unit's supply chain as well as its sales of Windows OEM licenses and Surface devices.

But Microsoft didn't reduce its guidance for its other two businesses, presumably because it expected the cloud divisions to remain strong throughout the crisis. Microsoft's original guidance called for 13%-15% annual growth in Productivity and Business Processes revenue and 22%-24% growth in Intelligent Cloud revenue.

What does this mean for Microsoft's stock?

Microsoft's recent updates suggest rising usage of Azure, Office 365, Skype, Power BI, and its virtualization services could propel its Productivity and Business Processes unit and Intelligent Cloud unit beyond expectations in the third quarter. That growth could offset the softness of its More Personal Computing unit, which may also fare better than expected as more Chinese businesses reopen.

Investors seem to believe that those tailwinds will offset the coronavirus-related headwinds -- that's why the stock price only dipped about 1% since the beginning of the year as the S&P 500 tumbled more than 20%.

That resilience can be attributed to CEO Satya Nadella, who pivoted the tech giant toward cloud services over the past six years. Microsoft faces choppy waters as the pandemic causes economies to grind to a halt, but its commercial cloud businesses should continue growing throughout the crisis.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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