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IT's move to Azure drives Microsoft revenues skyward

The shift to remote work and accelerated cloud migrations during the pandemic have resulted in strong revenue growth for Microsoft. The company reported its Q4 earnings this week.

Massive tech companies like Microsoft and AWS have benefited from the COVID-19 lockdown significantly more than their smaller competitors as IT shops large and small move workloads from on-premises environments to the cloud, analysts said.

That observation was evident in Microsoft's earnings call this week. The company powered through the coronavirus pandemic, reporting fourth quarter revenues of $38.03 billion, up 13% compared to last year's fourth quarter, largely on the strength of its Intelligent Cloud Business.

The company's intelligent cloud business, which includes Azure, Windows Server, SQL Server and GitHub, generated $13.37 billion in revenue, up 17%, compared to last year's fiscal fourth quarter. Azure's revenue growth, however, slowed to 47%, down from 59% in the previous quarter.

While Microsoft does not break out Azure's revenues, the company said its cloud business passed the $50 billion mark for the fiscal year.

"The last five months have made it very clear that digital tech intensity is key to business resilience," said Satya Nadella, Microsoft CEO on this week's earnings call. "Organizations that build their own digital capability will recover faster and emerge from this crisis stronger."

Microsoft business users are accelerating digital transformation projects in light of the coronavirus, Nadella said, which is why Microsoft, too, is accelerating its own efforts to build a full technology stack fueled by cloud and AI technologies.

Moving large workloads to a pubic cloud allows companies to displace Capex, said Jeff Valentine, CTO at CloudCheckr.

"When users move to the cloud, they are avoiding having to buy more servers and so are conserving cash during these harsh economic times," he said.

Remote work investments surge

Microsoft also benefited from companies that scaled up remote work during the pandemic. Microsoft's Productivity and Business Processes unit, which contains Office, Dynamics and LinkedIn, reported $11.75 billion in revenue. The company noted that LinkedIn's 10% gain in revenues for the quarter was slowest growth for the product since Microsoft acquired it in 2016.

The company reported Office 365 and Microsoft 365 sales grew 15% year over year. "This reflects the strong adoption of free trial offers that enabled customers to quickly adapt to needed remote work scenarios," said Amy Hood, Microsoft's CFO.

The operating margin for the unit for the quarter was 33.8%, which is the lowest since fiscal 2017. The company attributed the dip to the weaker job market, less spending on advertising, and the marketing expenses associated with promoting its Teams communications application.

According to Nadella, the aggressive marketing and technology investments made in Teams is paying off as the product is gaining rapid acceptance among large and small IT organizations.

When users move to the cloud, they are avoiding having to buy more servers and so are conserving cash during these harsh economic times.
Jeff ValentineCTO, CloudCheckr

"Teams is rapidly becoming the communications backbone as customers accelerate moving voice to the cloud," Nadella said. "We are expanding Teams beyond the workplace and will make it easier to add personal Teams accounts on mobile, so users can stay connected to friends and family."

Teams users generated over 5 billion meeting minutes in a single day this past quarter, according to Nadella, with 69 organizations each having more than 100,000 users deploying Teams.

Microsoft's More Personal Computing division, which includes Windows, search and its Surface devices, posted $12.91 billion in revenue. Sales of Windows devices dropped 4%, however, experiencing the slowest growth since 2016, Hood said. Licenses for consumer devices, however, grew 34% after dropping 10% in the previous quarter.

For the fiscal year ended June 30, Microsoft had revenues of $143 billion, 14% over fiscal 2019, with a net income of $44.3 billion, a 13% increase over the previous year.

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