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Microsoft Earnings Defy the Pandemic

By Billy Duberstein - Apr 30, 2020 at 9:39AM

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The company showed accelerating revenue growth even as COVID-19 swept across the world.

After gaining 4.5% during regular trading hours, shares of Microsoft (MSFT -0.50%) rose after hours on Wednesday when it reported its fiscal third-quarter earnings. That period included March, a month in which much of the economy had to be shut down to contain the spread of COVID-19, as many turned to remote work and schooling.

While Microsoft will no doubt be somewhat affected by an economic downturn, it also benefits from more cloud usage, sales of laptops, and video gaming activity. As of now, it looks like the positive trends are vastly overwhelming the negative ones. In fact, Microsoft's overall revenue accelerated, if you can believe it.

A young woman sits on her couch  looking at her laptop that has many tiled pictures on the screen.

Microsoft delivered growth amid the COVID-19 pandemic. Image source: Getty Images.

Stunning growth

Microsoft's year-over-year revenue growth rate ticked up in the quarter ending in March over the previous quarter, despite COVID-19 rocking the global economy. While this may be somewhat surprising, those who have been following Microsoft for a while might have predicted as much.

The company's high-growth cloud services, especially its Azure infrastructure-as-a-service platform, continue to make up a larger and larger part of the business, propping up growth. Azure grew 59% in the quarter and 61% in constant currency, retaining its solidly high growth rate and powering the overall intelligent cloud to become the largest segment at the company.

Microsoft Segment 

Q3 2020 Revenue

Q3 2020 Revenue Growth (YOY)

Q2 2020 Revenue

Q2 2020 Revenue Growth (YOY)

Productivity and business processes

$11.7 billion

15%

$11.8 billion

16%

Intelligent cloud

$12.3 billion

27%

$11.9 billion

27%

More personal computing

$11 billion

3%

$13.2 billion

2%

Total

$35 billion

15%

$37 billion

14%

Data source: Microsoft quarterly earnings. Table by author. YOY=year over year.

Keep in mind, the third quarter is a lower seasonal quarter than the second quarter, which is why Microsoft's business accelerated year over year despite declining quarter over quarter.

Video game demand spurred increased Xbox sales in the quarter, even though the new Xbox console hasn't yet been released. Its unveiling is set for November, yet another milestone for shareholders to look forward to. Still, Xbox sales accelerated to 2% growth as opposed to an 11% decline in the fiscal second quarter, helping the more-personal-computing segment accelerate as well.

More of the same positives

Microsoft also continued to exhibit nice operating leverage, with operating income growing 25% to $13 billion and net income up 22% to $10.8 billion, both at higher rates than revenue growth.

The company also continued to return cash to shareholders, with $9.9 billion in dividends and share repurchases, up 33% year over year. Like big-tech rival Alphabet (GOOG -0.67%) (GOOGL -0.66%), Microsoft didn't shy away from repurchasing shares as the stock fell during Q1.

Looking ahead

Not every single element of Microsoft's business is going like gangbusters, however. The company did note a sharp slowdown in LinkedIn advertising at the end of March. In addition, management reported declines in transactional licensed software revenue, particularly for small and medium-size businesses.

Still, these are relatively minor portions of the Microsoft empire. The vast majority of its products are now sold on a recurring subscription revenue basis, and mostly to large enterprises that are likely to survive the virus. On the conference call with analysts, CEO Satya Nadella noted that Microsoft was the only company offering a seamless portfolio of software, cloud, videoconferencing, and identity and security, making it a unique one-stop shop for implementing remote work. And he pointed out that even in an economic downturn, a switch to cloud computing makes sense because of its efficiency.

CFO Amy Hood gave relatively in-line guidance, so investors didn't have any reason to think Microsoft would be materially slowed by the crisis. Therefore, it's not surprising to see the stock rise almost all the way back to its previous February highs.

Given the likely need for remote work in the near term, and perhaps a preference for it in the long term, Microsoft looks primed to benefit as a provider of must-have enterprise tools to keep businesses running in a decentralized or hybrid manner. While the stock has already had a strong run, Microsoft seems poised to keep up this level of growth and high profits, making it perhaps the safest big technology stock for the next few years.

Suzanne Frey, an executive at Alphabet, 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. Billy Duberstein owns shares of Alphabet (C shares) and Microsoft and has the following options: short May 2020 $90 puts on Microsoft. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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