How Microsoft Makes Money: Personal Computing, Cloud Services

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Microsoft Corp. (MSFT), one of the world’s biggest tech companies, sells personal computing devices, cloud systems and services, software and other products. With products geared toward both consumers and businesses, Microsoft competes in a broad range of industries against companies including Apple, Inc. (AAPL), Inc. (AMZN) International Business Machines Corp. (IBM) and Oracle Corp. (ORCL).

Key Takeaways

  • Microsoft sells computing devices, cloud systems and services, software and other products to consumers and businesses.
  • The company’s Productivity and Business Processes segment is the largest source of revenue growth, while Intelligent Cloud is the fastest-growing.
  • The company reported record quarterly sales in its 2Q 2020 report on January 29.
  • A federal judge on Feb. 13 ordered Microsoft to halt work on a $10 billion Pentagon cloud computing contract until a legal challenge by is resolved.

Microsoft’s Financials

In FY 2019 ending June of 2019, the company posted substantial year-over-year (YOY) gains in revenue, net income, total assets, and other metrics. Net income was $39.2 billion, up 136.8% YOY. It is notable that net income for FY 2018 was abnormally low as a result of a $13.7 billion net charge related to the enactment of the Tax Cuts and Jobs Act, while FY 2019 net income was $2.4 billion higher for the same reason. For FY 2019, operating income rose 22.5% to $43.0 billion on a 14.0% gain in revenue to $125.8 billion. 

Microsoft’s financial results have continued to improve in the two quarters following FY 2019. Thanks to performance by its cloud and commercial businesses, the company reported strong earnings as quarterly revenue increased by 14% YOY in both Q1 and Q2 of FY 2020.  Q2 revenue reached a record for the company and Commercial Cloud was especially strong, with revenue rising 39%.

Microsoft’s Business Segments

Microsoft divides its business into three reportable segments, breaking out results by both revenue and operating income: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. These segments are categorized according to both product type and customer demographic. Productivity and Business Processes, for instance, includes products across multiple platforms and devices relating to productivity and communication. And More Personal Computing focuses on products designed with end users, developers, and IT professionals in mind.

Productivity and Business Processes

Microsoft’s Productivity and Business Processes segment includes a portfolio of products designed to enhance corporate productivity, communication, and information services. One of its major products is Microsoft’s Office software suite, including both Commercial and Consumer divisions. The segment also includes business solutions products such as Dynamics as well as the professional networking site, LinkedIn.

In FY 2019, Productivity and Business Processes generated $41.2 billion in revenue, making it the second-largest of Microsoft’s segments. This amounted to an increase of 14.8% YOY, slower than the YOY growth of 20.1% in FY 2018. In FY 2019, this segment represented nearly 33% of Microsoft’s total revenue. Productivity and Business Processes also accounted for $16.2 billion in operating income in FY 2019, or almost 38% of total operating income, up 25% YOY.

Intelligent Cloud

The Intelligent Cloud segment comprises all of Microsoft’s public, private, and hybrid server products as well as cloud services for business. These include Microsoft SQL Server, Windows Server, GitHub, Enterprise Services, and more.

For FY 2019, Intelligent Cloud generated $39.0 billion in revenue, the smallest portion of each of Microsoft’s three segments, but still 31.0% of all revenue. Up 21.0% YOY, Intelligent Cloud was the fastest growing revenue segment in FY 2019. This segment accounted for $13.9 billion in operating income, or about 32% of the total for FY 2019. This was up 20.8% YOY.

More Personal Computing

Microsoft describes its More Personal Computing segment as consisting of products and services aiming toward “harmonizing the interests of end users, developers, and IT professionals,” no matter the device. The Windows operating system, Surface device, and gaming products are all included in this segment.

In FY 2019, More Personal Computing generated the most revenue of any of Microsoft’s three segments. With $45.7 billion in revenue, More Personal Computing accounted for about 36% of total revenue. However, it posted the smallest YOY increase in revenue of any segment, climbing by just 8.1%. Nonetheless, More Personal Computing was still a major profit contributor to the company as its $12.8 billion in operating income accounted for nearly 30 of revenue. Operating income rise 20.8% YOY, the same rate of growth as Intelligent Cloud.

Microsoft’s Recent Developments

Microsoft in October was awarded a $10 billion contract to build a cloud computing system for the Pentagon, signaling a major setback for Microsoft’s biggest rival, The 10-year contract, called JEDI for Joint Enterprise Defense Infrastructure, known as JEDI, would position Microsoft to get a total of $40 billion in federal cloud computing contracts in the next few years. Amazon, seen as a favorite to win the contract, filed a protest against the Microsoft contract in the U.S. Court of Federal Claims in November. A federal judge on Feb. 13 ordered Microsoft to halt work on on the contract until Amazon’s challenge is resolved.

Source: Investopedia

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