Microsoft posted the third quarter of its 2020 financial results today, and all eyes are on the early impact of the ongoing coronavirus pandemic. The company is reporting revenue of $35 billion and net income of $10.8 billion. Revenue is up 15 percent, net income jumped 22 percent, and Microsoft says “COVID-19 had minimal net impact on the total company revenue.”
Microsoft does note that, in the final weeks of the quarter, which ended March 31st, “there was a slowdown in transactional licensing, particularly in small and medium businesses, and a reduction in advertising spend in LinkedIn.” Windows has been a surprising bright spot this quarter thanks to an increase in PC demand, but Microsoft has clearly struggled with supply constraints in China for both Surface and lower end OEM PCs.
The pandemic has obviously boosted remote working, and Microsoft has benefited through its Office business and cloud offerings. “We’ve seen two years’ worth of digital transformation in two months,” explains Microsoft CEO Satya Nadella. “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.”
There’s certainly been an increased demand for Windows PCs during the pandemic for both work-related activities and students trying to learn from home. Windows OEM Pro revenue grew by 5 percent, thanks to “increased demand to support remote work and learn scenarios.” Some of this demand increase was offset by supply issues in China, though. Non-pro revenue declined by 10 percent, though, as Microsoft continues to see strong competition for lower-priced devices and supply constraints in China.
Speaking of PCs, Microsoft’s Surface revenues only increased 1 percent this quarter, likely because the company hasn’t launched any new Surface products during the recent quarter. Microsoft has been selling its updated Surface Pro 7, Surface Laptop 3, and the new Surface Pro X for around six months now, though.
We’re now expecting Microsoft to unveil new Surface Book 3 and Surface Go 2 devices in May, and rumors also suggest the company is ready to launch its Surface Buds and potentially an update to the Surface Dock. Microsoft has not yet announced any Surface hardware event for May, but given the pandemic, any hardware unveils will be online either way.
Microsoft is still continuing work on its Surface Duo Android hardware, and we’re expecting to hear more about plans for this device at the virtual Build developer conference next month. Microsoft’s other dual-screen device, the Surface Neo, has reportedly been delayed, so we’re no longer expecting to see that device in 2020.
Xbox and gaming were both strong for Microsoft this time last year, and recent reports have suggested console spending has increased during the pandemic. Microsoft says overall gaming revenue declined 1 percent this quarter, with Xbox content and services increasing by just 2 percent despite increased engagement during stay-at-home orders.
Microsoft is expected to further detail its plans for the Xbox Series X in the coming weeks, including unveiling some games that will be available on the console. The company revealed its full Xbox Series X specs last month, including a 12 teraflop GPU, 16GB of memory, and special 1TB expansion cards.
Satya Nadella did surprise with some new Xbox numbers during an earnings call with investors, though. Xbox Game Pass has hit 10 million subscribers, and Xbox Live has nearly 90 million monthly active users. These are both impressive figures, and it’s the first time Microsoft has provided Xbox Game Pass numbers.
Like most of Microsoft’s revenue quarters, the real growth comes from the company’s cloud and Office divisions. Office Commercial products and cloud services revenue increased 13 percent, and even Office Consumer products and cloud services revenue increased 15 percent, with Office 365 consumer subscriptions hitting 39.6 million.
Microsoft Teams usage has also hit 75 million daily active users, up 70 percent in just a month. Nadella also noted that Microsoft saw 200 million meeting participants in a single day earlier this month, a figure that brings Teams closer to Zoom’s 300 million daily meeting participants.
Server products and cloud services revenue has increased 30 percent this quarter, year over year, and this part of Microsoft’s revenue takes up the biggest chunk at $12.3 billion. Productivity and Business Processes, which includes Office, LinkedIn, and Dynamics, generated $11.7 billion this quarter, with More Personal Computing revenue (that includes Windows, Surface, and Xbox) making $11 billion. Microsoft continues to hold a diverse slate of products and businesses.
Microsoft also became a $1 trillion company around this time last year, and the company has maintained that market cap despite the ongoing pandemic. While the pandemic had little effect on today’s Q3 results, Microsoft’s guidance for Q4 still shows revenue growth for its businesses.
In an investor call, Microsoft CFO Amy Hood said the company expects “continued demand” across Windows, Surface, and gaming, and that the outlook assumes this remains through much of Q4. Assuming that advertising spend won’t improve, search and LinkedIn revenue will be impacted.
Update, April 29th 6:40PM ET: Article updated with guidance and comments from Microsoft’s earnings call.