Microsoft will turn 45 years old next weekend, and over those years, it has faced a lot of challenges on the road to becoming one of the most valuable companies in tech. Right now, like the rest of the world, it's in the middle of a crisis that threatens to upend the global economy.
Even though Microsoft is in good shape to weather the storm, the uncertainty caused by the coronavirus pandemic makes it almost impossible to predict how enterprise tech companies will fare over the course of this cataclysmic year. Consumer companies, like Apple and Amazon, face difficult but better-understood challenges around consumer demand, yet the prolonged impact of the economic shutdowns demanded by the severity of this outbreak will take some time to assess.
That's because, generally speaking, enterprise software is not an impulse buy. Microsoft warned investors in February that demand for Windows PCs will come in lower than expected thanks to COVID-19, but it did not reduce its guidance for the two divisions — Productivity and Business Processes, which includes Office 365, and Intelligent Cloud, which includes Azure and Windows Server — that have driven most of its growth over the six years that Satya Nadella has been in charge.
Still, a lot has changed since Microsoft issued that warning a month ago. A Microsoft representative declined to comment for this story, referring back to its statement from February.
Unemployment claims have skyrocketed as lots of small- and medium-size businesses are closing or operating with a skeleton crew due to widespread restrictions on travel. A sizable number of Microsoft customers can likely operate their businesses with a remote workforce, but no one understands exactly what will happen if, as Goldman Sachs recently predicted, second-quarter GDP falls by 24% and unemployment reaches 30%, a shocking figure — far greater than the worst numbers seen during the Great Depression — that the Federal Reserve Bank considers plausible.
"No one is immune," said Brent Thill, a financial analyst with Jefferies who covers Microsoft. "Everyone is going to be impacted, to what degree, it's not clear."
Still, there's lots of reason to think that Microsoft's pivot to cloud computing could be what gets it through this historic time.
Companies forced to work remotely for an extended period of time certainly are not going to cancel their Office 365 subscriptions outright, and might even see value in paying for extra features that help them manage a new set of workflows, such as Microsoft Teams.
"I don't think, you know, one month ago I would have thought of 'work from home' as a complete new scenario with the type of spikes we have today," Nadella told Axios earlier this week.
On the other hand, businesses forced to cut jobs will not need as many seats for their Office 365 accounts, and if hiring falls off a cliff, companies certainly won't be adding new seats. Microsoft has also been trying to get customers to upgrade their Office 365 subscriptions to premium plans, and those customers could find it hard to justify spending more money on bells and whistles if they have to tighten their belts, Thill said.
The other aspects of what Microsoft calls its "commercial cloud segment," a metric drawn from various portions of Microsoft's official business units that has been a progress bar for its cloud shift, are generally sold across multiyear contracts. Most of that activity should continue apace, according to a research note from Bernstein's Mark Moerdler.
"Existing recurring revenue streams (software maintenance, subscription and Cloud) should be reasonably unaffected [by the impact of coronavirus] while new sales could be impacted in affected areas," Moerdler wrote.
Some businesses might be forced to renegotiate their contracts if they no longer need as many virtual machines in Azure thanks to falling demand for their products, and others might put off upgrading older systems to save cash for a few months. But cloud computing, or, more generally, IT modernization, is a little like car maintenance: you can put it off, but you run the risk of causing greater problems down the road.
One potential speed bump for enterprise software companies could arrive on the sales side: A surprising number of large enterprise software deals still go down on the golf course. Yet, here again, Microsoft is well positioned: 95% of revenue generated by those commercial cloud products comes from partners and resellers, many of whom have local ties to businesses in their area that don't require a trip to the airport.
"Large multinational software/cloud companies with sales personnel located where most of the customers are will be better positioned than those that have to fly personnel in to close a deal," Moerdler wrote in a note issued before stay-at-home orders were implemented in several states. "In fact, it is possible that those leveraging local resellers, given they often have long-term relationships with potential customers, could be better positioned than those relying on their own sales personnel."
Still, it's clear that Microsoft will feel some pinch from the consumer-oriented sides of its business as people hunker down and watch their money closely.
In some ways, there's never been a better time to buy an Xbox, but most of the people in the market for a new gaming console will likely wait until November, when the next-generation Xbox Series X console is released in anticipation of the holiday shopping season. Nadella told CNBC that supply issues related to the effects of the outbreak in China were abating, but "the bigger issue is what happens in the United States and Europe and other developed markets around the demand side of this."
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Microsoft executives, Wall Street analysts and others will have a much clearer picture of where the company stands in about a month, after the first quarter closes and earnings season kicks into gear. Hopefully, we'll also have a better understanding as to whether the spread of coronavirus continues across the country, or whether the fabled curve has started to flatten, something even the most plugged-in health experts in the country simply don't yet know.
This pandemic was always going to get worse before it got better, but with $134 billion in cash and short-term investments in the bank, and strong demand for its enterprise software products, Microsoft could emerge on the other side of this crisis stronger than ever.
