Microsoft gets a bump-up in numbers thanks to COVID-19

The coronavirus outbreak is causing chaos in the financial markets, but with every crisis there are those who will benefit financially; Microsoft appears to be one.

The Redmond-based internet giant has reported its latest quarterly results, and it appears the lockdown is becoming a catalyst for profits. Total revenues increased 15% over the three-month period ending March 31, operating income was up 25% to $13 billion and net income jumped 22% to $10.8 billion.

With share price growing 4.5% in the final hours of trading, and a further 2.6% during the pre-market hours, Microsoft’s market capitalisation is more than $1.35 trillion, making it the most valuable corporation worldwide.

“We’ve seen two years’ worth of digital transformation in two months,” said 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.”

The coronavirus pandemic has forced families behind closed doors and employees to work from home. With lockdowns still in place in many of the worlds developed markets, new norms are bedding in and Microsoft is certainly one of those companies who will benefit.

Breakdown of Microsoft financial performance by business unit
Business unit Revenues Year-on-year
Productivity and Business Processes $11.7 billion 15%
Intelligent Cloud $12.3 billion 27%
More Personal Computing $11 billion 3%

Source: Microsoft Investor Relations

With more people working remotely, more businesses are being forced through a digital transformation process, and much more aggressively than most would have liked. To enable efficient work process, more cloud resources will have to be consumed by enterprise customers, though it is likely additional products will also be taken on in areas such as security.

For a company which has pivoted over the course of the last decade to position cloud front and centre of the business, current trends are incredibly beneficial.

For Microsoft, the revenues for the Azure cloud computing products surged 59% over the three months, while Teams now has more than 75 million daily active users, tripling over the last two months. 20 organizations with more than 100,000 employees are now using Teams, with new features being introduced each week. Live events for up to 100,000 attendees can now be streamed across the platform. Office 365 now has 258 million paid seats, while usage of Windows virtual desktop tripled this quarter.

But it is not just the enterprise-focused business units who are profiting.

Microsoft 365 Personal and Family now has more than 39 million subscribers, while Teams has been opened to consumer users for the first time. Windows 10 now has more than 1 billion monthly active devices, up 30% year-over-year, and Xbox has seen a boost also.

With children not being allowed to play outside in the garden and adults not allowed to play inside pubs, an obvious beneficiary was going to be the online entertainment segment. Netflix has already demonstrated financial gain with 27% uplift in revenues and a 22% boost in subscribers during its own earnings call, and Xbox has seen a similar lift.

Xbox Live currently has 19 million active users, while the Xbox Game Pass has more than 10 million subscribers. Although the team did not offer specifics when it came to the cloud gaming venture, Nadella said Project xCloud has “hundreds of thousands of users” in the beta stages in seven markets, with eight more launching over the next few weeks.

One question which does remain is whether this boost in revenues will be sustained?

“In our consumer business, we expect continued demand across Windows OEM, Surface and Gaming from the shift to remote work, play and learn from home,” said Microsoft CFO Amy Hood. “Our outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease.

“In our commercial business, our strong position in durable growth markets means we expect consistent execution on a large annuity base, with continued usage and consumption growth across our cloud offerings.”

The risk of this benefit is that everything returns to the pre-COVID-19 way of life. Offices gradually become re-populated and the lessons from remote working are forgotten by traditional organisations. This would mean the bump in revenues would not be sustained by the cloud companies.

Although we suspect some traditional organisations might return to pre-COVID-19 working practises, many will adopt at least a portion of the newly transformed way of life. The extremity of the current bounty for the cloud companies will not be sustained, but there should be a shift in mentality over the long-term.

We tend to agree with the cloud companies that this enforced digital transformation programme will bed-in, though perhaps not as enthusiastically as the cloud companies believe. These are salespeople let’s not forget, selling the potential of Microsoft to investors. There will be sustained benefits, but some in society will be intolerant of evolution, so will returns to the ways of old.

Microsoft to expand xCloud beta to Western Europe

After launching in the UK, US and South Korea, Microsoft has decided to rollout its services in an additional eleven markets.

Gaming has always been a staple in the Microsoft diet, thanks to Xbox and Game Studios in bygone years, but cloud gaming offers an opportunity to dramatically scale the business unit. This is a market development which could potentially lower the barrier of entry for consumers, as cloud services are less reliant on extortionately expensive consoles and upgrades. The rewards could be an expanded userbase and new revenues.

But Microsoft is not alone in pursuit of gaming fortunes. Google and Nvidia have their own platforms to challenge for the throne, while Sony and Nintendo lead numerous other firms chasing down the leaders. If Microsoft is to create a leadership position, it will have to be aggressive in its development and rollout of services.

The new markets for the beta are Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Spain and Sweden.

“Bringing the Project xCloud preview to gamers across Western Europe is a top priority for us,” said Catherine Gluckstein, GM for Project xCloud. “We know gaming is an important way for people to remain connected, particularly during these times of social distancing, but we also recognize how internet bandwidth has been impacted with strain on regional networks as large volumes of people responsibly stay home and go online.”

While it will not present as much of a problem for the network as popular streaming services, Gluckstein is right in that the team will have to be careful to ensure it is not placing undue strain on the networks. In Italy, Telecom Italia CEO Luigi Gubitosi partly attributed a 70% surge in traffic at the beginning of the Italian lockdown on gaming titles Fortnight and Call of Duty, where the online features are incredibly popular.

Although it is far too early to decide on who is winning the cloud gaming segment, consumer entertainment is an important area for Microsoft. Revenues across the last quarter declined for Xbox, though this was expected as a new console is ready to launch, but the team boasted of a new record for Xbox Live monthly active users and Xbox Game Pass subscribers more than doubled.

Recurring revenue is the Golden Goose for the digital economy and cloud gaming could be one of the more fruitful coops.

Who is set to benefit from the COVID-19 outbreak?

For millions of individuals and businesses, the threat of COVID-19 is financial ruin, but there are parts of the technology industry that are benefiting from the considerable changes forced on society.

The FTSE 100 Index is likely to close below 5,000 today, a 27% decline in a month, while the Dow Jones is currently down (at the time of writing) 31% over the same period. Economies around the world are being hit disastrously hard, but some will see gains out of this pandemic at least temporarily, if not permanently.

Cloud Computing

The cloud computing segment has been on the rise for years, though as more employees find themselves restricted to their homes more workloads will have to be migrated to the cloud to ensure the business can function as usual.

For the cloud companies, the coronavirus outbreak is effectively forcing some organisations through a very rapid digital transformation project, to embrace the cloud and mobility trends. From an IaaS perspective it means more money, from SaaS it means more engagement and PaaS more opportunity.

Amazon Web Services, Microsoft Azure and Google Cloud are the obvious beneficiaries as market leaders, though for companies like Oracle, who might be working with more traditional industries that have resisted evolution to date, new conversations about enabling the workforce will have to occur.

Interestingly enough, once these businesses have begun their journey towards a cloud-based business model and environment, it is highly unlikely they will go into reverse. This could be a catalyst for accelerating the already fast-blossoming cloud segments.

Video conferencing and collaboration

Although there is no substitute for a face-to-face meeting to progress and complete complicated projects, alternatives have to be sought today. Many businesses are encouraging more meetings to be conducted via video links rather than email to not only ensure effective communication but ensure well-being of employees. Contact with colleagues via video link is not perfect by any stretch, but it might assist some who are feeling the loneliness of remote working.

Microsoft is an obvious beneficiary here, it announced last week the number of daily active users for its Teams collaboration suite increased by 12 million, though there are many others who are financially better off also.

Zoom Video Communications, a remote conferencing services company headquartered in San Jose, has seen share price increase 130% since the beginning of the year, while more marketers are turning to companies like ON24 to purchase webcasting and webinar services to ensure lead generation projects can continue.

As mentioned above, some companies are being forced into a digital transformation project meaning some of the remote working capabilities might be retained in the long-term, but virtual alternatives are never going to be a complete replacement for face-to-face meetings, where we can subconsciously pick up non-verbal communication cues so easily.

Electronic payments

The likes of Visa, Mastercard and AMEX are already benefitting from long-standing trends where physical cash is quickly becoming a thing of the past, though the COVID-19 outbreak could accelerate this.

In the short-term, some shops are now only accepting digital payments, though as the total number of transactions are decreasing, so will revenues. That said, in the long-term it could force customers into adopting digital payments.

Although cash is quickly becoming a thing of the past, some from the traditional generations still resist the use of digital currency. The chequebook took years to fall out of common usage as banks and shops were still compelled to accept such payment when offered. The same could be said of physical cash; as long as some still want to use it, it will persist. But in refusing to accept physical payments, shops are forcing some individuals to adopt digital payments.

This is not a likely to be a permanent change for all, but it might be for some, both in terms of consumers who adopt digital payments and the shops who will now only accept digital currency.

Ecommerce

The more people are at home bored, the more likely fingers are going to venture towards the eCommerce apps to spend the money which has been saved from not going to the pub. Your correspondent’s household has turned into a satellite Amazon storeroom thanks to certain individuals in the flat.

Streaming, gaming and video content platforms

This is perhaps the most obvious example of a beneficial segment.

In terms of video streaming, parents will need to occupy children, while adults will also need entertaining as pubs, clubs, theatres, parks, beaches, holidays and gigs all disappear. Netflix is already immensely popular, but with more people stuck at home in the evenings, it may well become more so, but this benefit is not limited to the content king. All streaming platforms could benefit, while Disney+ is launching at a good time to capture the attention of European consumers.

In terms of video platforms outside of streaming, YouTube is enjoying particular success. Not only are there those who are trying to entertain themselves, but there is also millions of hours of information (some much more accurate than others) on the pandemic itself.

From a gaming perspective, this is back to the boredom conundrum. With the usual entertainment venues shut down, consumers will need to be entertained. The likes of Microsoft Xbox, Google Stadia and PlayStation are likely securing additional subscriptions as well as in-game purchases.

Savvy corporates

For those corporations who in a more fortunate cash position than others, the shock to the financial markets could be viewed as an opportunity. Softbank is a perfect example.

Today (March 23), Softbank announced it was selling off certain unnamed assets to fund a second share buyback programme. Combined with the first announced on March 13, Softbank will be able to retire 45% of Softbank shares which are currently on the open market.

Generally speaking, the fewer shares which are on the open market, the less exposed a company is to external influences. All you have to do is look at the conflict between Elliott Management and Twitter/AT&T/Telecom Italia to see what influence an activist investor can have on a business where share price has taken a decline. Share buyback programmes could be viewed as a way to protect a corporate strategy from short-term influences and aggressive investors.

Online grocery delivery

With the rush on supermarkets persisting as the days turn into weeks, online grocery delivery companies are seeing a surge in popularity.

Online shopping delivery service Ocado suspended its website last week, telling customers demand exceeded its capacity to deliver. The firm has said it would fulfil its orders and will soon reopen, with rations placed on certain food items. Share price for Ocado has surged this month, though it did decline once it announced it would temporarily stop taking orders.

The telecommunications industry

The telecommunications industry is critical to today’s society functioning seamlessly, though it has traditionally been ignored. Consumers have simply expected the internet to work without appreciating the importance of the telecommunications industry. Telcos are viewed as boring companies, paid little attention in everyday life.

Thanks to the number of people attempting to entertain themselves, work from home or access educational resources the telco industry has been thrust into the limelight. Authorities are putting in measures to protect these valuable assets, not only to ensure consumers are able to continue their daily lives but so emergency services can continue to function, or research labs can collaborate to create a vaccine.

The telco industry underpins the success of almost every element and facet of society, and now the networks are under pressure, everyone realises it.

Microsoft’s resurgence continues, driven by strength in cloud and gaming

Microsoft’s results demonstrated a continued upward trajectory, with the cloud and gaming units standing out with particularly strong performances.

Since wrapping up the last financial year by breaking the $100 billion annual revenue mark three months ago, Microsoft should not have been immune to the recent financial market gloom hanging over the technology sector. But the Q1 results of its financial year 2019 published on Wednesday are telling a different story.

On corporate level, the total revenue was $29.1 billion, up by 19% over the same period last year, and net income reached $8.8 billion, up by 34%, indicating an excellent management of both the top line and bottom line.

“We are off to a great start in fiscal 2019, a result of our innovation and the trust customers are placing in us to power their digital transformation,” said CEO Satya Nadella. “We’re excited to help our customers build the digital capability they need to thrive and grow, with a business model that is fundamentally aligned to their success.”

All the business units have registered growth, but the most impressive part is how balanced the company has become.

Microsoft Financials Q3 2018

More Personal Computing continued to be the largest revenue contributor with $10.7 billion, an increase of 15%; this is a story of two extremes. Standing out in this group is the gaming division, which reported a revenue growth of 44%, with Xbox software and services revenue up by 36%, indicating its strategy to tie exclusive titles from gaming companies is reaping rewards. At the other end of the spectrum, Windows OEM grew by 3%, further proof that the PC market is slowing, but the pronouncement of its demise is still premature. Between the two extremes sat search advertising (Bing) which grew by 17%, Surface up by 14% indicating the new models are winning some traction, and Windows commercial products and cloud services, up by 12%.

Productivity and Business Processes contributed $9.8 billion in revenue, an increase of 19%. The Office commercial and consumer products and cloud service as the business application suite Dynamics all registered healthy growth, but what caught our eyes was the 33% revenue growth by LinkedIn, and a 34% increase in average session length. The revenue numbers may still be small (it is not disclosed separately) but it is a sign that two years after the $26 billion acquisition of the professional social network Microsoft is turning it around. This is particularly impressive when compared to the lacklustre performance reported by Facebook recently.

Intelligent Cloud, the smallest of the three business units by revenue reported the highest growth rate of 24%. Azure continued to deliver stellar numbers, its revenue increased by 76%. This may be lower than the 90% growth it reported last quarter but would surely be the envy of any other company.

If Microsoft’s mobile first strategy flopped badly a few years ago, its cloud first strategy is definitely paying off. As Amy Hood, the CFO said, “We see continued demand for our cloud offerings, reflected in our commercial cloud revenue of $8.5 billion, up 47% year over year.”

The management is confident in the next quarter, giving bullish guidance during the earnings call

Microsoft looks to take Xbox experience onto mobile

Microsoft has announced the launch of Project xCloud to take the world of Xbox gaming onto mobile.

The idea is a relatively simple one. Gaming is traditionally a better experience on consoles which are specifically designed for gaming, but Microsoft wants to take this experience into the mobile world of tablets and smartphones. Trials will start next year and will allow gamers to take the same content from games built for the Xbox console and PC onto their smartphones, using a Bluetooth enabled handset or an under-development touch overlay.

“The future of gaming is a world where you are empowered to play the games you want, with the people you want, whenever you want, wherever you are, and on any device of your choosing,” said Kareem Choudhry, Corporate VP of Gaming Cloud at Microsoft. “Our vision for the evolution of gaming is similar to music and movies – entertainment should be available on demand and accessible from any screen. Today, I’m excited to share with you one of our key projects that will take us on an accelerated journey to that future world: Project xCloud.”

Compatibility with existing and future Xbox games has been enabled by building out custom hardware in Microsoft data centres. The team have architected a new customizable blade that can host the component parts of multiple Xbox One consoles, as well as the associated infrastructure supporting it. The custom blades will be scaled out through the Azure cloud regions over time.

Currently, the test experience is running at 10 Mbps, though the team are keen to bring this down while still maintaining the same experience for gamers through advances in networking topology, and video encoding and decoding. The idea is to ensure these games can be played on 4G networks, though getting the bitrate down might be a tough ask considering the depth and interactivity of the content on consoles such as Xbox.

One thing is very clear; gaming is just another aspect of the mobile world which is pressing the case for 5G.

Microsoft has an ambition to ensure this content will be able to meet consumer experience demands on 4G networks, though this is a selfish view on networking. These games are incredibly immersive and will place additional strain on the network. For the telcos, the issue is not the singular demands of browsing, video or gaming, but the sum of all the parts. Gaming is just another item which has been thrown on top of the teetering pile of network strain. The efficiency gains of 5G will soon become a necessity, not the buffering-free cat video gains of today.

Looking at the gaming industry, growth is gaining momentum fast. Research from Newzoo suggests mobile gaming will generate $70.3 billion across 2018, accounting for roughly 51% of the industry total. This equates to 25% year-on-year growth, compared to 4.1% growth on consoles, such as Xbox, which is expected to account for $34.6 billion. Mobile’s share of gaming is expected to increase to 59% by 2021, taking $106.4 billion. Asia will account for the majority of this spend, though the gains will be experienced in every region.

An excellent example of the surge of mobile of gaming is Fortnite. While this might be a title most play through consoles or on PC, the most recent update for the game saw 60% surge in data traffic over normal peak traffic levels on Verizon’s broadband network, as well as a 5-8% jump on mobile.

The tsunami of mobile gaming titles over the last 4-5 years has improved the accessibility of gaming for the general public, though the complexity of these games in also growing. While this segment of mobile content might have been simplistic to start with, think of Candy Crush, more in-depth games are becoming increasingly popular with the general public. The proportion of games which require constant connectivity is also increasing. Should the Microsoft project prove to be successful, both in terms of operation and adoption, these trends will only be accelerated.

Gaming is no longer a niche, and pretty soon it will start to weigh heavily on the network.

Microsoft gives VR another kick in the teeth

The virtual reality segment might have been gathering some momentum over recent months, but Microsoft’s neglect of VR for its Xbox platform adds another dent into the credibility of the technology.

It’s been a tough week for the VR enthusiasts. IDC research estimated sales declined 30.5% year-on-year over the first quarter, largely thanks to telcos unbundling the devices from premium contracts and handset deals, while a snub from one of the biggest gaming platforms on the planet will not help the situation either.

Speaking in an interview with Gamesindustry.biz, Microsoft’s Chief Marketing Officer for the gaming business, Mike Nichols, confirmed there was little or no work being done for virtual or mixed reality, at least when looking at Xbox.

“We don’t have any plans specific to Xbox consoles in virtual reality or mixed reality,” said Nichols. “Our perspective on it has been and continues to be that the PC is probably the best platform for more immersive VR and MR. As an open platform, it just allows faster, more rapid iteration. There are plenty of companies investing in it in the hardware side and the content side, or some combination therein.

“Obviously on phones, augmented reality is a good scenario as well that’s going to grow. But as it relates to Xbox, no. Our focus is primarily on experiences you would play on your TV, and ultimately we’d like to make those experiences more broadly.”

For the VR community, this could be a very worrying view. The influence of PCs in the consumers life is declining rapidly, while gaming consoles such as Xbox remaining a constant. The PC will never disappear, and should the connected anywhere PC take off there might be a resurgence, but being limited to a dying area of the technology world should not be viewed as a positive.

Looking at the advertising and promotional campaigns for the general public, it is clear the VR community feels TV is a perfectly suitable platform for the technology. Almost every advert you see which has some element of VR in it focuses on the living room, billing the technology as a way to bring families together, but with Xbox not considering the platform appropriate for the technology, prospects are slightly dampened.

VR will have a place in the world at some point, but the road is proving a very bumpy ride right now.