• Microsoft released fourth-quarter and 2020 fiscal year earnings on Wednesday, beating analyst estimates in many ways, but falling short in key areas.
  • While Microsoft stock is down more than 3 percent mid-day Thursday to less than $205 per share, the earnings report was largely received positively by Wall Street analysts.
  • However, many analysts said they'll be keeping an eye on Microsoft's slowing Azure cloud revenue growth, and weakness in the small and medium business market.
  • Are you a current or former Microsoft employee? Contact this reporter via encrypted messaging app Signal (+1-425-344-8242) or email ([email protected]).
  • Visit Business Insider's homepage for more stories.

Microsoft released earnings for the company's first full quarter amid the pandemic on Wednesday, easily beating Wall Street expectations on the top and bottom lines — thanks in large part to a surge in its Office 365, Windows, Surface, and Xbox businesses.

But it wasn't all good news: Microsoft fell short of estimates in key areas such as revenue growth for its Azure cloud computing business and overall revenue for the productivity business unit that includes its Office 365 cloud software and Teams chat app.

The company's stock is down more than 3 percent mid-day Thursday to less than $205 per share.

While analysts remained largely bullish about Microsoft and its prospects for future growth, the reception was a departure from the overwhelmingly positive analyst comments that typically follow the company's financial results.

This time, analysts outlined some concerns as Microsoft continues to show slowing cloud growth and fewer small and medium businesses purchasing its software.

Jefferies analyst Brent Thill, for example, has three "key concerns" about Microsoft earnings: Azure growth, revenue in the productivity business segment, and the company's operating margin all came in below expectations.

Microsoft missed expectations for the "Productivity and Business Processes" unit including Office 365 and Teams, citing a slowdown in transactional licensing particularly among small and medium businesses.

Productivty and Business Processes — which also includes Office products for businesses and customers, LinkedIn revenue and Dynamics products and cloud services — reached $11.75 billion in Microsoft's fourth-quarter, missing estimates of $11.9 billion. 

Microsoft cited a a slowdown in the traditional, one-time purchase model of buying software known as transactional licensing.

Microsoft Chief Financial Officer Amy Hood on the company's earnings call said it expects weakness in the small and medium business market to continue, impacting transactional sales for the company's Office software and its business selling its Windows operating system to PC manufacturers.

Going forward, Morgan Stanley analysts said it expects Microsoft to "sustain momentum through a difficult environment."

"Having said that," the firm's analysts said, "with management calling out several areas of impact driven by SMB headwinds, we recognize the immediate risks."

Microsoft reported Azure revenue grew 47 percent year-over-year in the fourth quarter, coming in slightly below Wall Street estimates and significantly below its growth rate in previous quarters.

Azure revenue has been falling pretty consistently since after October 2017 earnings release when the company reported a 98% Azure growth rate (subsequent growth rates were 93%, 76%, 76%, 73%, 59%, 62%, 59%). Analysts have in the past chalked the decline up to the "law of large numbers — meaning the bigger these platforms get, the harder it is to post larger growth figures.

This quarter's growth rate, however, was 12 percentage points less than the previous quarter, bucking a general trend of more modest declines. Analysts generally identified the falling growth rate as an area to watch, but seemed mostly unfazed.

"While I am not yet concerned with the declining Azure numbers as the revenue base is growing, it's something to keep our eyes on," Moor Insights & Strategies analyst Patrick Moorhead said. "I can imagine, given the pandemic, how difficult full digital transformations would be without having employees at work."

Microsoft analysts still think the company is in a good place in a difficult time.

Wedbush analyst Dan Ives called the stock slide a "knee-jerk reaction" from investors in response to the Azure growth rate, and that he expects Microsoft to see continued momentum in its cloud business.

Nucleus Research analyst Daniel Elman suggested the pandemic could continue to force companies to move to the cloud faster, benefitting Microsoft.

"The demand for further cloud usage and services will continue, so this growth could accelerate even further – especially as it becomes more and more apparent now that the companies with the most integrated, modern, and resilient technology stacks are those that will bounce back the fastest from any economic hardship or future shutdowns," Elman said.

Microsoft CEO Satya Nadella made comments to that effect on the company's earnings call Wednesday, saying while "no one can take away from the fact that GDP is going to be negative," companies are no longer viewing the modernization of their IT as optional projects, but key to their ability to survive disruptions to their businesses.

Got a tip? Contact this reporter via email at [email protected], message her on Twitter @ashannstew, or send her a secure message through Signal at 425-344-8242.

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