Microsoft stock slides 2% after reporting earnings that easily beat Wall Street estimates, as the pandemic pushes the cloud, Windows, and Xbox to growth

Microsoft CEO Satya Nadella.ChinaFotoPress via Getty Images

  • Microsoft reported fourth-quarter and full fiscal year earnings at market close on Wednesday, beating Wall Street estimates on the top and bottom lines.
  • Microsoft continued to see strong growth in businesses like Office 365, Microsoft Azure, Windows, and Xbox, as stay-at-home orders nationwide lead to heightened demand for both remote work tools and video games.
  • For the first time, Microsoft posted $50 billion in annualized recurring revenue for its commercial cloud business, which includes sales of Microsoft Office and Azure to businesses.
  • However, its Office and Windows businesses were hurt by a slowdown in transactional licensing to small and mid-sized businesses, Microsoft said.
  • The stock is trading down over 2% at the time of publication.

Microsoft reported earnings for its fiscal fourth quarter and the full 2020 fiscal year earnings at market close on Wednesday, beating analyst expectations for overall results but missing estimates on a key business unit including its Office products.

Here's what the company reported for Q4 2020:Advertisement

  • Revenue: $38 billion (Wall Street expected $36.5 billion), compared to $33.7 billion in the same quarter last year.
  • Earnings: $1.46 per share, compared to analysts' estimate of $1.37 per share.
  • Profit: $11.2 billion, down 15%
Here's what the company reported for its fiscal year 2020:
  • Revenue: $143 billion, up 14%
  • Earnings: $5.76 per share, up 14%
  • Profit: $44.3 billion, up 13%

Shares are down more than 2% in after-hour trading to less than $206 per share following the release.

While the company beat on many of its most important metrics for the fourth quarter, it did notably miss expectations on the key business unit that includes Office 365 cloud productivity suite and its Microsoft Teams communications app.
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The unit — which is called "Productivity and Business Processes" and includes Office products for businesses and customers, LinkedIn revenue and Dynamics products and cloud services — reached $11.75 billion in Q4, missing estimates of $11.9 billion.

For the second quarter in a row, Microsoft said it experienced a slowdown in transactional licensing, especially for small and medium businesses. Microsoft said the slowdown contributed to a 34 percent decline in revenue for Office products used by businesses, "reflecting continued customer shift to cloud offerings from multi-year on-premises agreements." Transactional licensing refers to the traditional, one-time purchase model of buying software. Microsoft's "Intelligent Cloud" business, which includes Azure, server products, enterprise and cloud services, brought in $13.37 billion in Q4 revenue, slightly beating analyst expectations. Microsoft doesn't report revenue figures for its Azure cloud computing business, but said revenue grew 47% from the same period of 2019 — a notable dropoff from the 59% growth rate it posted in the prior quarter, and 62% in the quarter before that.Advertisement

Revenue for the business unit Microsoft calls the "More Personal Computing," unit which includes Windows, search, Xbox and Surface, was $12.9 billion in Q4, up 14% from this time last year.

Meanwhile, Microsoft said its commercial cloud business – which includes Microsoft Azure, Office 365 and other cloud services – surpassed a $50 billion annualized run rate for the first time this year.

While the pandemic has created challenges for many companies, including the smaller partners Microsoft relies on to sell its software and services, the shift to remote work has been a considered boost to the overall company, as users turn to products like the Microsoft Teams chat app and the Microsoft Azure cloud.Advertisement

Microsoft last week cut a small number of jobs as it transitioned to the new fiscal year. One person familiar with the situation told Business Insider the cuts affected less than 1,000 jobs. Microsoft's professional social network subsidiary LinkedIn on Tuesday announced plans to cut an additional 960 jobs.

Microsoft also made significant changes last month by announcing plans to shut down its video game streaming service would be shut down and plans to close of most of its retail stores. Those moves, analysts say, signal CEO Satya Nadella's strategy to ruthlessly prioritize Microsoft's strengths and cut its losses in other areas.

Got a tip? Contact this reporter via email at astewart@businessinsider.com, message her on Twitter @ashannstew, or send her a secure message through Signal at 425-344-8242.Advertisement

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