Microsoft's having 'a good war' so far as COVID-19 fuels "2 years worth of digital transformation in 2 months"

COVID-19 has had a minimal impact on business so far. That was the main takeaway from Microsoft’s Q3 2020 earnings announcement yesterday, which saw revenue  up 15% year-on-year to $35 billion, net income of $10.8 billion and growth across all offerings - Dynamics 365 revenue up 47%,  Intelligent Cloud up 27%, Azure up 59% etc.

What’s driving this? According to CEO Satya Nadella, it’s a massive acceleration of priorities:

As COVID-19 impacts every aspect of our work and life, we have seen 2 years' worth of digital transformation in two months. From remote teamwork and learning to sales and customer service to critical cloud infrastructure and security, we are working alongside customers every day to help them stay open for business in a world of remote everything. There is both immediate surge demand and systemic structural changes across all of our solution areas that will define the way we live and work going forward.

In a world where Zoom’s profile has soared, Nadella pointed to Microsoft’s rival Teams offering as a case in point:

We're accelerating Teams innovation, adding new capabilities each week, and now support meetings of all sizes, meetings that scale from 250 active participants to live events for up to 100,000 attendees to streaming broadcasts.

We saw more than 200 million meeting participants in a single day this month, generating more than 4.1 billion meeting minutes. Teams now has more than 75 million daily active users, engaging in rich forms of communication and collaboration, and two thirds of them shared, collaborated, or interacted with files on Teams. And the number of organizations integrating their third-party and Line Of Business apps with Teams has tripled in the past 2 months.

In healthcare alone, there were more than 34 million Teams meetings in the past month. New capabilities enable providers like Northwell Health, New York State's largest health provider to deliver first-class tele-health. And the NHS in the United Kingdom is using Teams to ensure staff have the tools they need to do their vital work.

Beyond Teams, the Microsoft CEO was keen to flag up use cases of how the various component parts of the firm’s offerings are being used in the battle against the current pandemic:

Developers are also collaborating on mission-critical projects from tracking the spread of COVID-19 to implementing contact tracing to helping expand access to personal protective equipment. We are bringing GitHub to even more developers, making core features free for the first time for teams of any size.

COVID-19 has accelerated the urgent need for every business to create no-code/low-code apps and workflows in hours or days, not weeks or months. Power Platform is already used by more than 3.4 million citizen developers and business decision-makers. If you can create an Excel spreadsheet, you can create an app, build a virtual agent, automate a workflow, analyze data, and share insights in real time.

In just 2 weeks, Swedish Health Services, the largest nonprofit health provider in the Seattle area, used Power Apps to track critical supplies. Thousands of organizations are relying on new integration between Microsoft Teams and Power Apps to share timely information. And governments around the world are using Power BI to share the latest COVID-19 data with their citizens. Leaders in every industry, from global health care company, GSK, to Coca-Cola to Toyota, are all using Power Platform to accelerate their automation.

There’s also the inevitable AI pitch:

In AI, customers are applying a comprehensive portfolio of tools and services and infrastructure to address unique challenges, including those created by COVID-19. In health care, we are seeing compute data and AI come together to help speed up response from testing to therapeutics and vaccine development. Health care providers have created more than 1,400 bots using our Healthcare Bot service, helping more than 27 million people access critical health care information.

The Center for Disease Control is using the Healthcare Bot to help people self-assess for coronavirus symptoms. Adaptive Biotechnologies is using our tools to decode the immune system's response to the virus. And ImmunityBio is using more than 24 petaflops of computing power on our cloud to help researchers build models in days instead of months.

Long term

Looking longer term, Nadella reckons that there will be three phases evident as the world emerges from the current crisis:

The phase we are mostly in right now is that first response space, where from business continuity perspective people want to be able to work remotely, want to be able to conduct remote operations. That's what's leading to increased demand in Teams or increased demand in remote desktop and security and what have you. Of course, there are certain sectors like the health care sector, there is even education obviously, as well as some of the public sector organizations - they all have surge demand or even in some segments of retail, where there is surge demand, so that's something that we are scaling to meet their needs.

Then I believe, as we work out here, if you think about the next phase of recovery, it's more like a dial. Things will start coming back in terms of economic activity and we'll have to keep adjusting the dial. This hybrid work is going to be there with us for a period of time. That's where some of the sort of architectural product strength of ours will be very useful to our customers. Even just take Teams. Teams is not just about having lots and lots of video meetings. Teams is about actually getting work done where meetings and video is one part. The utility of it will only increase for our customers as some people come back to work, some people are remote, you have to collaborate without any fatigue. So that's that second phase.

And then the third phase is where there is going to be structural change. There's no turning back, for example, in tele-medicine? If you look at even what has happened in this first phase with AI bots powering tele-medicine triage, that’s going to change what healthcare outcomes look like. Same thing in education.

As for Microsoft’s own business bets, Nadella concedes there are many possible ‘ins and outs’ to be factored in, but argues:

If you step back and ask yourself, say, 2 years from now, ‘Is there going to be more being done in the public cloud or hybrid cloud or less?’. The answer is more, just because it is more efficient. It is the only way for you to have even the business continuity required in times like this. Your needs going forward of increasing digitization are going to be met with better pricing, better economics at a unit price level for the given business. That’ what we use to forecast out what we commit, both in terms of CapEx, OpEx, innovation and customer engagement.

Ultimately, Microsoft's not immune from what's happening broadly in the world in terms of GDP growth. But at the same time, if there is going to be economic activity, then I would claim that digital as a component of that economic activity is going to increase. And specifically, the full stack we have from infrastructure to our SaaS applications are going to be very competitive in that context.

My take

Microsoft is having what we might call ‘a good war’ so far. There remains the longer term question of how much of an impact enterprise level budget cuts will have on cloud spending or how sustainable a “two years of digital transformation in two months” frenzy is moving past the initial spike. Nadella is confident that Q4 will see “consistent execution on a large annuity base, with continued usage and consumption growth across our cloud offerings”. He’s almost certainly correct on that. But once the world starts moving through his described phases, the nature of the structural change to society and the economy that he anticipates will crucial - and that’s a factor that remains unclear for now.