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You’ve probably heard of Microsoft or used a product from this American technology company. But have you ever wondered how Microsoft business is done?
Microsoft is a top manufacturer of tech products including personal computers and electronics. It also offers software for each of these products to increase user productivity. Microsoft business is one of the biggest in the tech industry and is ranked among the Big Five tech companies in the world that include Apple, Facebook, Google, and Amazon.
There are three business segments and they are Intelligent Cloud, Productivity and Business Processes, and More Personal Computing. Each can be differentiated from the other based on its operating income as well as revenue. Also, they differ in the type of products they target and the client demographic.
To that effect, the list of products you’ll find in the Productivity category covers those related to productivity and communication. These products are compatible with devices running on different OS and several devices. More Personal Computing category, on the other hand, has products tailored to different classes of users. Let’s take a closer look at each:
This category consists of products that are meant to improve productivity. An example of such a product is the Microsoft Office suite. There are also products that aid in networking and as such, are aimed at proffering a wide range of business solutions.
There’s also the Dynamics 365 which allows businesses to create feedback loops digitally. These loops get data from a system, which is used to optimize the results of another system. Much more, the Dynamics 365 AI allows a set of records to be converted to intelligence. There’s the Adobe and SAP, applications that also allow the exchange of data across systems.
Reportedly, the Redmond software giant was able to raise $41.2 billion from selling products in this segment in 2019. For this reason, the segment was one of the biggest of all the segments of the company’s products. In the same vein, it accounted for almost 33% and 38% of the revenue and income respectively, in FY 2019.
What’s more, Linkedln, a job-oriented online service falls under this segment. And Microsoft is also the parent organization of LinkedIn. In mid-2019, Microsoft revealed that there are over 645 million users of LinkedIn. Also, the platform offers the most comprehensive resource to enable businesses to manage and communicate with their talent.
This segment also consists of popular devices from Microsoft. Some of these are the Microsoft Surface, one of its series of touchscreen laptops. Other products in this segment are the Windows OS, Search advertising, and the Xbox console.
Furthermore, this segment helped the company to raise revenue and income of $45.7 billion and $12.8 billion respectively. This segment accounted for 36 percent of the total earnings for the quarter. Despite making a major proportion of the company’s earnings, it was the least YOY increase in revenue given that it had surged by 8.1 percent.
Here’s a segment that consists of cloud services that are tailored to businesses. Some examples of products in this category are GitHub, Microsoft SQL, etc. Unlike the other two categories, the earnings gotten in this segment were the smallest for 2019. Here, $39 billion, which was still significant given that it amounted to 31 percent of the company’s total revenue. Its operating revenue also set at $13.9 billion, and it made 32 percent of FY 2019. Interestingly, it was also the segment whose revenue grew faster.
It is also worth noting that Microsoft is actively using Artificial Intelligence to improve the world. For starters, it has products centered at AI for health, AI for earth, AI for accessibility, and AI for humanitarian action, and AI for cultural heritage. In the case of AI for health, the company is looking to use AI in fighting COVID-19. It intends to issue grants worth $20 million to researchers and organizations at the forefront of battling the disease. It also plans on collaborating with researchers to combat the virus.
Microsoft offers products to enhance the things humans can do. Some of these products are smart applications & bots for smartphones. They include MileIQ, SwiftKey, Calendar.help, SwiftKey, Zo, Microsoft Pix, Power BI, and MyAnalytics. The more popular ones are Microsoft 365 and Microsoft Azure.
Microsoft 365 consists of office applications such as Word, Excel, Powerpoint, etc. to aid business in their daily operations. It also has communication features to support group chat, calling, online meetings, and web conferencing to aid team member collaboration. Azure, on the other hand, comes with a list of tools that enable people to work remotely irrespective of where they are. Microsoft also revealed in 2019 that about 95% of Fortune 500 are confident in Azure to handle high-end workloads.
Microsoft released its financial report in June 2019, which showed it had recorded gains. These gains were spread across its revenue, total assets, net income, etc.. According to Microsoft, its revenue, operating income, and cash flow were over $125 billion, $43 billion, and $50 billion respectively. In the same year, over $30 billion was returned to the company’s shareholders.
Compared to the years between 2015 and 2018, the total revenue was significantly higher. For instance, the company’s revenue in 2015, 2016, 2017, and 2018 were $93 billion, $91 billion, $96 billion, and $110 billion, respectively. Its total assets of $286 billion for 2019 was also higher given that these assets were 174 billion, 202 billion, $250 billion, and $258 billion for 2015, 2016, 2017, and 2018, respectively.
What’s more, Microsoft noted that it was operating the largest commercial cloud business worldwide. And the segment had yielded an earning of over $38 billion in 2019 while its gross margin had spiked to 63 percent. Also, there was a sharp increase in net income given that it was $39.2 billion, a 136.8% YOY. Compared to 2018, the net income is significantly higher and it could be noted that a low net income of $16 billion for 2018 was a result of a $13.7 billion net charge.
After FY 2019, there has also been a remarkable improvement in Microsoft’s revenue. The latter can be tied to the good turn out of its cloud services. Per the company’s report in the first and second quarter of 2020, the quarterly revenue was just as good and spiked by 14% YOY. Interestingly, the revenue of the second quarter is a major milestone for Microsoft business with its cloud revenue surged by 39%.
On April 9, 2020, Microsoft released its financial report for Q3 of 2020, “Earnings Release FY20 Q3”. According to Microsoft, its cloud business helped to spike its revenue in Q3, which ended in March 2020. The report also highlighted that there was a significant increment in the company’s revenue, operating income, and diluted earnings for each share.
Specifically, the revenue was $35 billion making it a 15% increase from what was raised in the Q3 of 2019. The operating income was up by 25% given that $13 billion was raised. Also, the net income and diluted earnings for each share were $10.8 billion and $1.40 respectively. Either of these had spiked by 22% and 23%.
There was also a breakdown of the earnings of the three main segments the company’s products are tailored in. Remarkably, each segment also recorded significant results. Per the company’s data, the revenue of $11.7 billion was raised in its Productivity category and it was a 15% increment from the Q3 of 2019. Even though sub-segments in this category experienced a surge in income, LinkedIn had the highest revenue increase given that it sat at 21%. It was closely followed by a 17% surge in revenue.
Also, the Intelligent Cloud category’s earning was $12.3 billion and it was a 27% increase from the same quarter in 2019. The sub-segment in this category to have made more increase in revenue is Server products and cloud services. The increase stood at 30%.
More Personal Computing’s earnings increased by 3% thanks to the revenue of $11 billion raised in the segment. And compared to the other two segments, its percentage increment is the lowest. Also, Windows Commercial products had a 17% increase in revenue in this segment, whereas there was no YoY change in the revenue for Windows OEM.
According to Microsoft, it also assesses its earnings using the metric, constant currency. This metric helps the company to understand how it had performed without considering the changes in the foreign currency rate.
Accordingly, the metric also showed that there had been a spike in revenue. For instance, the revenue for the quarter was about $35 billion while that of Q3 2019 was about $30 billion. As such, this was a 15% change Y/Y. The operating income in Q3 of 2020 was about $10 billion, and that for 2019 was $8 billion, making a 25% change Y/Y.
Microsoft also outlined that the coronavirus pandemic had little effect on its total revenue. Categories like the Intelligent Cloud as well as Productivity saw a hike in cloud usage. Nonetheless, transaction licensing declined in weeks bringing the quarter to a close. There was also a decline in advertising spend on the job-oriented platform, LinkedIn.
Furthermore, a spike in demand was recorded for products in the More Personal Computing category. These products are not limited to Microsoft Surface, Xbox consoles, Windows commercial products, etc.
Microsoft linked the heightened interest in these products on the fact that they are devices that enable users to learn or work remotely. Besides, the lockdown in China affected the supply of similar products, which indirectly helped to spike its earnings for the quarter.
Likewise, Microsoft noted that there was more engagement in the gaming segment. It outlined that the increase was due to the stay-home order from the government. Yet, Search was affected as a result of a reduction in advertising spend. This reduction was evident in industries that were most affected by the coronavirus pandemic.
Microsoft won a whopping $10 billion contract called Joint Enterprise Defense Infrastructure (JEDI), in October 2019. Pentagon awarded the contract with the aim of getting a cloud computing system from Microsoft. Besides, the contract was a step in the right direction in setting another competition for Amazon, one of Microsoft’s top contender.’
Much more, the deal meant Microsoft would receive up to $40 billion in cloud computing contracts. Nonetheless, it won’t all be a bed of roses given that Amazon had contended the deal in court. The company was also a favorite including Google, Oracle, and IBM to obtain the deal and as such, it took the matter to the U.S. Court of Federal Claims. While the filing was in November, a federal judge ordered that Microsoft stop work on the contract on February 13, 2019.
In early May 2020, Microsoft revealed it is building its first cloud data center in Italy. The company is towing the path of Google and Amazon Web Services, both of which had already done the same in Milan. According to Microsoft, $1.5 billion has been budgeted to build the cloud data center within a five year period.
The software giant also added that the platform is aimed at providing new opportunities and even promote economic growth in the Italian nation. Synergy Research Group also revealed that Microsoft is the second-largest cloud provider in Europe closely followed by Google. The company also noted that its datacenter regions were more than that of other providers as of 2019. Specifically, data centers were launched in the Middle East and in South Africa.
Recent reports also revealed Microsoft may be acquiring CyberX, an Israeli cybersecurity firm. There are expectations that the $165 million deal between the duo will be signed in June 2020. Nonetheless, negotiations had begun between the two sides even before the coronavirus pandemic was in full swing.
Microsoft has come a long way. 45 years later and it’s still growing in size and revenue. The company has launched products and services in different industries, which has increased people’s productivity, and efficiency. In return, it has impacted positively on its revenue and made it a tough competitor to even the best tech companies today.