Microsoft Earnings, COVID, and You (Premium)

Microsoft’s earnings this week were greeted with cheers and a lot of celebratory backslapping, at least virtually, given social distancing. But what does the data really tell us about the firm’s consumer businesses?

Before diving in, I can say that the most interesting tidbit from earnings was this little quote from its FY20 (Q120) earning press release:

“COVID-19 had minimal net impact on the total company revenue.”

Um, what now?

Microsoft has spent the past two months frantically and incessantly communicating about COVID-19, and it has promoted its Microsoft 365 suite of solutions as the cure-all for our new work at home requirements and the suddenly sped-up “digital transformations” that companies around the world are experiencing. Its cloud infrastructure has wheezed and nearly collapsed under the weight of increased demand, a fact that Microsoft addresses only quietly, in community forum posts, and an issue that the market leader, Amazon, never seems to suffer from. And the firm is communicating ... what here? Normalcy in a time of pandemic?

That’s a rather amazing marketing spin for a single sentence in a press release, and I assume it can be excused away by the fact that Microsoft’s overall business, at least from a revenue perspective, has remained on track when viewed from a high level, like outer space. But I think it’s more important and pertinent to note that Microsoft’s collective businesses have been put in a blender and thrashed beyond recognition, just like the rest of the global economy. And that what emerges on the other side of that most unwanted digital transformation is a very different mix of businesses and strategic priorities.

The most basic shift can be seen if you move a bit closer to the company, say from the stratosphere, from a place where you can observe its three top-level business units. For years now, I’ve been watching the relative financial performance of each to see when what Microsoft promotes---the cloud---actually surpasses what’s quietly been making most of the firm’s revenues during this time, which is a legacy product like on-premises servers, Windows, and Office.

That’s hard to do. Microsoft smartly and purposely mixed on-prem/legacy businesses with cloud businesses in each of those top-level units to hide the truth. On-prem servers are mixed in with Exchange. On-prem Office is mixed in with the Office bits in Office 365 and Microsoft 365. And so on.

But there is one part of Microsoft that provides a bit of insight in this regard: Its curiously named More Personal Computing business unit is where it lumps Windows, Surface, and Xbox. And while some of that is moving to the cloud, sort of, those parts are tiny. So most of the revenues in this business unit don’t come from the cloud. And there’s no good way to hide that.

And on that note, Microsoft’s top three business units each delivered roughly one-third of the firm’s revenues for seve...