“Windows 10 now has more than 1.3 billion monthly active devices,” CEO Satya Nadella revealed on Microsoft’s Q3 FY2021 earnings call, which essentially means that there are roughly as many devices running Windows 10 as there are people in India. It’s little surprise that Windows sales are growing so sharply, what with the pandemic boosting remote working to new heights over the last year. “Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating, and it’s just the beginning,” Nadella said. It is very significant that unlike streaming services, Microsoft’s finances are not suffering from accelerated demand slowing down, and is in fact continuing to grow in spite of the fact that in many parts of the world, lockdowns are a thing of the past. Microsoft made US$41.7 billion in revenue this quarter.
Microsoft gets tax benefit from India
Microsoft said it recorded a tax benefit of US$620 million due to a favourable ruling in the Supreme Court of India in March. As the company tells it:
In March 2021, the India Supreme Court issued a decision on withholding taxes in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax. The decision involves appeals filed by 86 individual companies operating in India, some dating back to 2012. Microsoft was not a party to any of the appeals but is impacted by the decision.
Microsoft has historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. The India Supreme Court ruled favorably for the companies in the 86 separate appeals, holding that software sales are not subject to India withholding taxes. Although Microsoft was not a party to the appeals, Microsoft’s software sales in India were determined to be not subject to withholding taxes. Therefore, Microsoft recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.
- Amy Hood, executive vice president and chief financial officer at Microsoft, said that cloud service revenue was at an all time high, with the company making 33% more this quarter (US$17.7 billion) than in the same quarter last year. This was a major contributor to the quarter’s revenue.
- Office Consumer products and cloud services revenue increased 5% (up 2% in constant currency) and Microsoft 365 Consumer subscribers increased to 50.2 million.
- Xbox content and services revenue increased 34% (up 32% in constant currency). The company launched the Xbox Series S and Xbox Series X last November, and has been consistently selling out the units it has been able to manufacture, giving a boost to game sales (the device sales themselves don’t contribute much revenue, as gaming consoles are generally subsidized.)
- Revenue in More Personal Computing overall (which includes Xbox and Windows license sales to PC makers) was $13.0 billion and increased 19% YoY.
Notes from earnings call
- Xbox revenues: “Xbox hardware revenue grew 232 percent and 223 percent in constant currency, driven by our new consoles. Xbox content and services revenue, which now includes ZeniMax, grew 34 percent and 32 percent in constant currency, with better-than-expected performance of first-party titles, particularly Minecraft,” CFO Hood said.
- Q4 revenues will be negatively impacted by COVID: “Last year, across Windows OEM, Gaming, and Surface, we saw surges in purchasing and usage that will negatively impact Q4 growth rates,” Hood warned.
- Healthcare: CEO Nadella said the healthcare industry was promising, touting the acquisition of Nuance as a step in more deeply engaging with the sector. “If you think about it as a percentage of GDP, obviously, healthcare is significant. And fundamentally, when I think about the provider market in particular, digital tech is going to play a huge role for every provider to do the things that they care the most about, which is improve the patient outcomes, and reduce costs, and reduce the burden on the physicians,” Nadella said.
Financial highlights — Q3FY21
- Revenue stood at US$41.7 billion, up 19% YoY.
- Operating income stood at US$17.0 billion
- Net income was $15.5 billion and increased 44% YoY