Like many other companies have done in the past few weeks, Microsoft (NASDAQ: MSFT) last month, a results warning was issued regarding the potential adverse effects of the coronavirus pandemic. But unlike some of them, the tech giant is about to emerge in a stronger position once the economic downturn has run its course.
This was not the case for Microsoft after the Great Recession of 2008-2009 where it struggled for several years to fully recover. But it is also a very different business. This is at least the message that Microsoft CEO Satya Nadella is sending to investors. In a recent interview, Nadella expressed confidence that Microsoft will emerge from the “fairly strong” pandemic. The CEO pointed to the software giant’s “big record” and what he called a diversified business that consists of a larger combination of annuity and non-annuity income than during the financial crisis 12 years ago . “We will weather the storm,” said the executive.
It is a sentiment shared by investors. Despite the strong sale in the general market in March, Microsoft has shown resilience. Shares fell 13% from mid-February to mid-March, but have been able to recover some of the losses since then. Since the beginning of the year, Microsoft shares have only been 4%. The company still has a market capitalization of over $ 1 trillion. He also took steps during the pandemic to position himself in relation to the force that Nadella spoke of.
Microsoft has more recurring revenues
For example, consider the annuity side of its operations. Earlier this week, Microsoft announced the renaming of Office 365, its cloud service with more than 38 million subscribers, to Microsoft 365. In addition to including more features based on artificial intelligence, Microsoft is launching a subscription plan for individuals and families that costs $ 6.99 and $ 9.99 per month, respectively. This is part of Microsoft’s efforts to get more consumers to use its cloud-based software and avoid having to force consumers to upgrade their operating systems every few years.
It also gives Microsoft more annuity-like income. The more recurring Microsoft has, the more reliable its results will be. In its second fiscal quarter, Microsoft announced a 19% increase in Office consumer products and cloud services, driven by continued growth in Office 365 consumer subscribers. New features, such as the ability to track expenses in Excel or get feedback while practicing a PowerPoint presentation, should entice more subscribers to Microsoft. Paid users also benefit from 60 minutes Skype and access to Teams, its digital collaboration tool.
It also helps Microsoft to abandon the PC software industry, which has seen a drop in demand in recent months. This is the reason why Microsoft published its warning on the results of its second fiscal quarter at the end of February. He said at the time that he did not expect to meet his revenue forecast for the More Personal Computing unit, which includes Windows OEM and its Surface products.
But since then things have changed on the PC side of the world. With millions of people around the world sheltered to slow the spread of the coronavirus, the demand for laptops, monitors, and other computer devices is increasing. According to NPD, in the first two weeks of March, laptops saw their sales increase by 10%, while sales of business laptops increased by 50%.
Increased use of cloud, teams and Skype
Demand for other Microsoft products is also increasing amid the COVID-19 epidemic, including Skype, the video conferencing service that Microsoft acquired in 2011 for $ 8.5 billion.
Outside of Office, Microsoft has a profitable and growing cloud business that saw demand increase during the pandemic. Its average daily users rose to 40 million, marking a 70% increase from month to month. There has also been a 220% increase in Skype call minutes. At the same time, Teams recently surpassed 44 million daily active users, more than double the 20 million in November. Demand is also increasing for Windows Virtual Desktop and Power BI, applications powered by Microsoft’s Azure cloud. This translated into a 775% increase in cloud services in regions that impose social distancing and / or orders for shelters on site.
All these new users and uses will not disappear once the virus is contained. The pandemic has changed the way we work, and it could last a long time in the future, increasing the demand for Microsoft products. Fitch, the credit rating agency, said so this week when it confirmed Microsoft’s AA + rating outlook on $ 70 billion in debt. Fitch said Microsoft’s cloud and server products are driving growth and mitigating weak PC business. Adapting Office software products to the cloud dissociates Office from PCs, noted Fitch.
On top of all that, Microsoft has entered the pandemic with a solid balance sheet of $ 134 billion in the coffers, and it generates more than $ 30 billion in sales each quarter. Wall Street expecting Microsoft to post 11% revenue growth in fiscal 2021, there are many reasons to suggest that the software giant should emerge stronger from the COVID-19 pandemic.