On the day the Federal Reserve Chairman called economic data for the second quarter “worse than any data we’ve seen for the economy,” Microsoft demonstrated that it’s doing just fine by blowing away consensus estimates, even exceeding pre-coronavirus forecasts.

Fiscal third-quarter revenue came in at of $10.75 billion, or $1.40 a share, on sales of $35 billion. That’s up from $1.14 per share on $30.57 billion in revenue a year ago and well ahead of analysts’ expectations of a $1.27-per-share profit on $33.76 billion in sales. Revenue numbers eclipsed even late-January estimates made before the COVID-19 pandemic struck outside China.

Nearly every aspect of Microsoft’s business benefited from the sudden shift of office workers around the globe to work-from-home arrangements. Intelligent Cloud revenue jumped 29% in constant currency to $12.28 billion, with 59% growth in the Azure Cloud tempered by lower growth in server products.

The company has seen “orders-of-magnitude increases in usage” of its cloud infrastructure and applications, said Chief Executive Satya Nadella (pictured). “We’ve seen two years’ worth of digital transformation in two months,” he said.

Resilient business

Microsoft’s earnings were being closely watched in the wake of Alphabet Inc.’s earnings announcement Tuesday that beat revenue estimates but missed on profits. Unlike advertising-driven Google, however, Microsoft’s search business is dwarfed by its more resilient revenue from software subscriptions and its giant cloud business.

And the cloud was clearly the place to be during the past month of lockdowns. Teams, the company’s collaboration platform, saw a one-day record of 200 million meeting participants during the quarter and has hosted 34 million meetings in the past month in the healthcare field alone, Nadella said. Use of virtual desktops tripled and the company even saw record use of its Xbox 5 gaming platform as people sought to relieve homebound boredom.

“Google and Microsoft are both benefiting from accelerated digital transformations brought on by the COVID-19 shutdown,” said Daniel Elman, an analyst at Nucleus Research Inc. “Microsoft operates at approximately 10 times the [cloud revenue] scale of Google and has seen better enterprise adoption so far.”

Michael’s ability run its applications like Teams, Office 365 and Dynamics 365 on its own infrastructure also gives the company an edge over rivals, Elman said. “For many customers, being able to run Microsoft applications on the Azure cloud is a key factor in choosing Microsoft.”

Microsoft is relatively insulated from the consumer market which has been hardest hit by the pandemic, said analyst Patrick Moorhead of Moor Insights & Strategy. “Microsoft offers products and services that are helping organizations get through the crisis,” he said. “These are not discretionary spends but are required to weather the pandemic.”

Office Commercial products and cloud services revenue grew 14% on 27% growth in Office 365 subscription revenue driven in large part by demand from users working from home. Overall Productivity and Business Processes revenue — which consists of Office 365, Office Consumer, Microsoft Dynamics and the LinkedIn social network — were $11.74 billion, up 16% in constant currency.

In after-hours trading Microsoft shares rose 3% on top of a 4.5% gain during the trading day. The stock is up nearly 13% this year while the Dow is down 13%.

Flight to IT

Big information technology providers have benefited as anxious executives have turned them to do quick deployments of services such as collaboration and videoconferencing and received a generally rapid response.

“Microsoft was a major force in enterprise transformation prior to the pandemic, but the past few months have elevated the role it is playing with businesses and governments globally,” said Nick McQuire, vice president of enterprise research at CCS Insight Ltd. In tweeted comments after earnings were released, he added, “In a matter of months, the world has gone through years of culture change on cloud thanks to the role it has played in helping firms rapidly shift to digital and remote-only operations.”

Microsoft issued cautious guidance for the upcoming fourth quarter, saying the market is unpredictable. It expects Productivity & Business revenues to come in between $11.65 billion and $11.98 billion, up between 6% and 9% from the same quarter a year earlier. Intelligent Cloud revenues are expected to be in the range of $12.9 billion to $13.1 billion, up about 15%, and Personal Computing revenues should come in at between $11.3 billion and $11.7 billion, flat to slightly up from the previous year.

Photo: Dixin Yan/Flickr