While SMB sector struggles, Microsoft's cloud business drives 13% revenue increase in Q4

Microsoft weathers the coronavirus pandemic thanks in large part to its Azure cloud business. (Microsoft)

While the Covid-19 pandemic had an impact on Microsoft's SMB sector and retail stores, its cloud business continued to pump out revenue.

Microsoft's "commercial cloud" revenue, which combines Azure, Office 365, Dynamics 365, and other cloud services, was $14.3 billion for the fourth quarter, up 30% from the same quarter a year ago. 

"We delivered record results this fiscal year followed by our commercial cloud, which surpassed $50 billion in revenue for the first time, up 36% year-over-year," said Microsoft CEO Satya Nadella during Wednesday's earnings call, according to the Seeking Alpha transcript.

While Microsoft doesn't break out Azure's revenues, Azure public cloud, Windows Server, SQL Server, GitHub and enterprise services, which make up its "intelligent cloud' business segment, posted $13.37 billion in revenue, which marked a 17% year-over-year increase and was above the $13.11 billion estimate by analysts. Azure's revenue growth was 47% in the fourth quarter compared to 59% in the third quarter.

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In May, Synergy Research Group said Amazon Web Services still held a hefty lead in the cloud space, with a worldwide market share of 32% while Microsoft was second with 18%.

For the fiscal year, Microsoft Chief Financial Officer Amy Hood said the company closed a record number of multi-million dollar commercial cloud contracts, with material growth in the number of $10-million-plus Azure contracts.

While the cloud business continued to thrive in the fourth quarter, the SMB segment was impacted by closures and temporary shutdowns. A decrease in transactional licensing by SMBs of Office business products contributed to a decline in Office commercial products of 34% in Q4.

"We expect the small and medium business weakness we saw in Q4 to continue, which will impact transactional sales, primarily in Office and Windows OEM," Hood said.

In addition to cloud, another bright spot for Microsoft in Q4 was the increased usage of Microsoft Teams over the past five months or so due Covid-19.

"Teams users generated more than 5 billion meeting minutes in a single day this quarter, and we are seeing increased usage intensity across the platform as people communicate, collaborate and co-author content in Teams," Nadella said. "Sixty-nine organizations now have more than a 100,000 users of Teams and over a 1,800 organizations have more than 10,000 users of Teams."

Microsoft's Q4 numbers

In the quarter that ended June 30, Microsoft's overall revenue increased 13% on an annualized basis. By contrast, revenue was up 15% in the previous quarter, which wasn't impacted as much by the coronavirus pandemic.

Microsoft's Q4 revenues were $38.03 billion, which beat analysts' expectations of $36.50 billion. Microsoft's earnings per share in Q4 were $1.46, which topped analysts average consensus of $1.34, according to Refinitiv.

On June 26, Microsoft said it would close its brick and mortar stores, which led to a one-time charge of $450 million, or 5 cents per share.

Microsoft's capital expenditures were $5.8 billion due in part to expanding its infrastructure to deliver Azure and its own online services.

Going forward, Microsoft projected $35.61 billion in revenue for the fiscal first quarter for an 8% increase in revenue. That forecast was slightly lower than the $35.91 billion that analysts had projected, according to Refinitiv.