Microsoft Earnings Surge on Azure Growth, Boosts Revenue to Highs

Microsoft Earnings Surge on Azure Growth, Boosts Revenue to Highs

Quarterly sales for Q2 2020 grew over 17% to an all-time high of $43.1 billion, buoyed by Azure growth and surprising Xbox console gains.

Quarterly sales for Q2 2020 grew over 17% to an all-time high of $43.1 billion, buoyed by Azure growth and surprising Xbox console gains.

Credit | Financial Times

Microsoft Corporation posted some record breaking quarterly sales, buoyed by massive growth within their cloud computing Azure division, and surprising growth from the Xbox gaming division. These were both pushed by pandemic-fueled demand for cloud computing and gaming, as many turned to those for either work or personal time.

2020 as a whole had been pretty good for Microsoft, the technology heavy giant, pushed into earnings season by a global pressure spinning things online. Most, if not all, of the company’s divisions showed heightened growth during 2020 and early 2021, as the pandemic accelerated the transition towards more technology use.

CEO Satya Nadella said Tuesday, “What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry.”

Microsoft’s seen a recent surge in not only its video gaming and cloud-computing services, but along their hardware Surface laptops, as people purchased more devices to work from home. Locking into that growth, Microsoft Teams, their first party video conferencing service also notched a heavy gain, boosted by work credibility and issues with competing service Zoom.

The company’s fiscal Q2 2021 (yes, somehow Q2 less than a month into 2021), notched a 30% gain in net income, to $15.5 billion. Total sales grew 17% to $43.1 billion, beating expectations of $12.6 billion and $40.2 billion respectively.

In this incredibly useful chart sourced from CNBC, below, you can see how Microsoft was boosted by growth literally across the board, a quite impressive feat for the company.

The most notable changes are in Microsoft’s Azure, Xbox, Office 365, and server divisions, with gains of 50, 40, 26, and 21% respectively.

Xbox grows by the minute

While Azure was expected to notch some record growth, the massive growth behind the company’s Xbox division was quite unexpected, especially due to the underwhelming hype when considered to Sony’s PlayStation 5. It doesn’t seem like expectations fit reality however, as the Xbox Series X, S, and the company’s Game Pass subscription bolstered the division anyway.

Xbox content and services grew 40% in Q2, even more impressive when compared to declining revenues the year before (-11% vs 40%). Part of this is in no doubt fueled by recent acquisitions, as Microsoft plans to recapture lost market share within the massive industry.

The company last year bought ZeniMax Media Inc., the parent organization behind popular companies such as Bethesda. ZeniMax has released major hits, such as the Elder Scrolls series, the Fallout series, and Doom, for $7.5 billion. All of those have become increasingly available across Microsoft’s gaming platforms, and to great avail.

Overall, Mr. Nadella has said that the launch for the newest Xbox consoles broke records for the company, including “the most devices ever sold in a launch month.” Gaming revenue specifically was up 51%, with the overarching division, (which includes video games and laptops), rose to $15.1 billion in sales, topping the previous #1, Azure and related cloud-segments.

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Video games, and Xbox specifically, have become a surprisingly increasingly important segment for the company. While these consoles are low-margin products, the real money for the company comes from subscription services, which are incredibly high-margin, and quite profit efficient.

To push higher profits and to push consumers to the company’s newer Xbox Game Pass, Microsoft planned on adding a price hike for one of its services, which backfired heavily. You can read about it here, but essentially, customers really didn’t like it.

Building momentum 101

Microsoft knew how breakout this quarter was going to be, pushed by the accelerating trends guiding the company’s highest growing segments. That was reflected in investors’ eyes as well, shown by massive boosts to the company’s stock price leading up to earnings.

Even after earnings, Microsoft’s stock is up 4% after market, down from a 6% gain, but still a great boost. This follows a rough 7% gain for 2021, beating out the S&P 500’s roughly 3-4% gain.

The weirdest thing out of all of this, is Microsoft’s gain in advertising revenue, which really wasn’t that big for the company beforehand. The company reported around $4-$5 billion in ad revenue across Bing, Edge, and their own LinkedIn, which still really weirds me out. While stale revenue growth was expected for LinkedIn, the division was up 23% compared to a previous 15.6%. Advertising revenue had an even lower estimate, with an expected drop of 5-9%, while it outperformed with a 1% annual growth. It’s weird.