Microsoft reports $35.7 billion in Q1 2021 revenue: Azure up 48%, Surface up 37%, and LinkedIn up 16%

Microsoft today reported earnings for its first fiscal quarter of 2021, including revenue up 12% to $37.2 billion, net income of $13.9 billion, and earnings per share of $1.82 (compared to revenue of $33.1 billion, net income of $10.7 billion, and earnings per share of $1.14 in Q1 2020). All three of the company’s operating groups saw year-over-year growth.

Analysts had expected Microsoft to earn $35.7 billion in revenue and report earnings per share of $1.54. The company thus easily beat expectations, suggesting some (but not all) units are benefiting from the effects of the pandemic. The company’s stock was up 1.5% in regular trading and flat in after-hours trading. Microsoft returned $9.5 billion to shareholders in the form of share repurchases and dividends during the quarter.

COVID-19 impact on the quarter

Microsoft is the first of the tech giants to report results for a second full quarter during the coronavirus pandemic. In the past two quarters, Microsoft had said COVID-19 had minimal net impact on total company revenue. This time, Microsoft merely said its “focus remains on ensuring the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology and resources to our customers and partners to help them do their best work while remote.” Indeed, Microsoft CEO Satya Nadella talked about “digital transformation” and didn’t even mention the virus.

“The next decade of economic performance for every business will be defined by the speed of their digital transformation,” Nadella said in a statement. “We are innovating across our full modern tech stack to help our customers in every industry improve time to value, increase agility, and reduce costs.”

A 48% revenue increase for Azure is good news for the company. Azure growth has been falling steadily: 76% in Q2 2019, 73% in Q3 2019, 64% in Q4 2019, and 59% in Q1 2020. It rebounded slightly to 62% in Q2 2020 but returned to 59% in Q3 2020 and then fell to 47% in Q4 2020. Slowing growth is normal at Azure’s size, and while the pandemic accelerated the trend, it appears to have settled.

$MSFT Azure revenue growth
– Q1 2018: 90%
– Q2 2018: 98%
– Q3 2018: 93%
– Q4 2018: 89%
– Q1 2019: 76%
– Q2 2019: 76%
– Q3 2019: 73%
– Q4 2019: 64%
– Q1 2020: 59%
– Q2 2020: 62%
– Q3 2020: 59%
– Q4 2020: 47%
– Q1 2021: 48%https://t.co/ru1cuCBFZr

— Emil Protalinski (@EPro) October 27, 2020

“Demand for our cloud offerings drove a strong start to the fiscal year, with our commercial cloud revenue generating $15.2 billion, up 31% year over year,” Microsoft CFO Amy Hood said in a statement. More cloud usage but slower revenue growth means signing on new customers and billing existing customers isn’t as easy during the pandemic. Microsoft does not break out exact Azure revenue numbers, likely to avoid comparisons with industry leader AWS.

Operating group highlights

Here are the highlights across Microsoft’s three operating groups:

• Productivity and Business Processes: Up 11% to $12.3 billion. Office commercial revenue grew 9%, Office consumer and cloud revenue was up 13%, and Dynamics revenue increased 19%. LinkedIn revenue increased 16%, and Office 365 consumer subscribers hit 45.3 million.
• Intelligent Cloud: Up 20% to $13.0 billion. Server products and cloud services revenue grew 22%, while Azure revenue was up 48%.
• More Personal Computing: Up 6% to $11.8 billion. Windows OEM revenue was down 5%, while Windows commercial revenue increased 13%. Search advertising revenue minus traffic acquisition costs fell 10%. Surface revenue increased 37%, and Xbox content and services revenue increased 30%.

Microsoft Office continues to be a cash cow for the company, thanks to its Office 365 subscription. Having over 45 million consumer subscribers for Office 365 is significant, but it still pales in comparison to the enterprise side. In Q3 2020, Microsoft passed 258 million paid Office 365 business seats (up from 200 million). On the Q1 2021 earnings call, Nadella shared that Microsoft now had 115 million daily active Teams users.

Meanwhile, the situation is mixed on the Windows side. In Q3 2020, Microsoft warned that “the effects of COVID-19 may not be fully reflected in the financial results until future periods.” Thanks to remote work and remote learning trends, Windows OEM and Windows Commercial revenue were both up in Q4 2020. At the same time, Windows OEM declined in Q1 2020, while Windows Commercial increased. Consumers appear to have satisfied their computer-buying needs, but businesses are still investing in new devices.

LinkedIn, Surface, and Gaming

Microsoft’s LinkedIn was doing well right up until the pandemic. Since the December 2016 close of the acquisition, LinkedIn had been delivering double-digit revenue growth for Microsoft. But in Q3, Microsoft issued a warning: “In the final weeks of the quarter, there was a slowdown in transactional licensing, particularly in small and medium businesses, and a reduction in advertising spend in LinkedIn.” In Q4, LinkedIn cut about 960 jobs, or 6% of its global workforce. In Q1, things are looking up, but 20%+ growth quarters are no more. Still, on the Q1 2021 earnings call, Nadella reported LinkedIn growth of 16% year-over-year to 722 million users.

Surface continues to bring in $1 billion each quarter. Q1 2020 ($1.35 billion) and Q2 2020 ($1.98 billion) followed the usual pattern, in that the former is the company’s worst quarter for Surface, while the latter is the best. Q3 2020 ($1.34 billion) was flat, and Q4 2020 ($1.72 billion) was excellent as Microsoft rode the wave of increased PC demand. Q1 2021 ($1.55 billion) was also decent, again if you consider Q1 as typically the worst Surface quarter. In May, Microsoft started shipping the Surface Book 3, Surface Go 2, Surface Headphones 2, and Surface Earbuds. Now that we have a full quarter of sales for those devices, it appears they fared well. (Microsoft doesn’t break out Surface revenue by device.)

For gaming, Q1 2020 and Q2 2020 were disappointing for Microsoft. Q3 2020 was a little better, while Q4 2020 was a home run. Q1 2021 looks to be somewhere in the middle, as gamers await next month’s Xbox Series X and Xbox Series S. Xbox content and services revenue increased 30%, and gaming revenue as a whole increased 22%. Games are performing well during the pandemic, and Microsoft has plenty to be happy about ahead of this holiday season.