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Microsoft earnings: Thanks for the clouds

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  • Q3 revenue: $35 billion (15% YoY, -5% QoQ, vs. $33.7 billion expected)
  • Q3 earnings: $10.8 billion (22% YoY, -7% QoQ, above expectations)
  • Q4 revenue guidance: Microsoft provided segment guidance instead of an overall number, but the total added up to a range of $35.85 billion to $36.8 billion, roughly in line with analyst expectations.

The big number: Revenue from Microsoft Azure grew 59% during the company's third fiscal quarter. While growth has steadily decreased as Azure starts to generate big revenue, Azure is growing faster than anything else Microsoft called out in its earnings release.

People are talking: "We have seen two years worth of digital transformation in two months," CEO Satya Nadella said on the company's earnings call.

Opportunities: A pandemic might be forever reshaping the world economy right now, but it's a good time to be in the enterprise cloud business. Microsoft's commercial cloud revenue — which includes Azure, commercial Office 365, Dynamics 365 and a few other things — grew 39% during the quarter, accounting for the bulk of Microsoft's growth during the quarter.

Current customers are using more and more of Microsoft cloud services thanks to stay-at-home orders: Microsoft Teams usage shot up from 20 million users per day late last year, to 44 million daily users in March and to 75 million daily users as of Wednesday's earnings call.

Potential customers no longer need an education in how cloud computing can modernize their technology infrastructure. Even sales of Microsoft's traditional Windows Server licenses are growing faster as companies increasingly opt for hybrid cloud strategies when upgrading their kit.

Threats: Microsoft had planned to spend more money on capital expenditures during its third quarter than it did in the previous quarter, but blamed the "supply-chain disruptions" that knocked several major manufacturers offline in China during January, as the country grappled with COVID-19. Instead, it spent roughly the same amount ($3.9 billion) on its cloud infrastructure, which had come under fire for the capacity issues that affected Azure customers during the quarter.

Commercial bookings growth fell off a cliff, increasing just 7% during the quarter compared to an increase of 30% in the quarter last year. Bookings are a notoriously imperfect metric when judging the future health of a software company, but that's a substantial drop compared to prior quarters.

The power struggle: Assuming it can fix its capacity issues, Microsoft is in as good a position as any major corporation heading into what could be one of the worst economic quarters in U.S. history. CFO Amy Hood vowed that Microsoft would "invest aggressively" in capital expenditures for its cloud business in the upcoming quarter, and that should help the company support the increasing activity from current customers and bring on new ones.

Enterprise software is not an impulse purchase; it's a vital part of any modern business, and demand for the types of services Microsoft provides will only increase once tech buyers start to understand what their 2021 budgets will look like. Still, competition among Microsoft, AWS and Google for that business is likely to increase, and those companies weren't exactly playing a friendly game of cards before the pandemic.

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