How Microsoft Makes Money: Computing and Cloud Services

Microsoft Corp. (MSFT), one of the world’s biggest tech companies, sells personal computing devices, cloud systems and services, software, and other products.1 With products geared toward both consumers and businesses, Microsoft competes in a broad range of industries against companies including Apple Inc. (AAPL), Inc. (MZN), 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 intelligent cloud segment is the largest source of profit, as well as the fastest-growing.
  • The COVID-19 pandemic has had positive impacts on certain aspects of Microsoft’s business, including its cloud business and productivity tools.
  • Microsoft announced in mid-January plans to acquire popular video game company Activision Blizzard for $68.7 billion.

Microsoft’s Financials

Microsoft announced in late January financial results for Q2 of its 2022 fiscal year (FY), the three-month period ended Dec. 31, 2021. Net income rose 21.4% to $18.8 billion. Quarterly revenue expanded 20.1% year-over-year (YOY) to $51.7 billion. Microsoft uses operating income as its profit metric for gauging the performance of its individual business segments. Operating income for the quarter grew 24.3% YOY to $22.2 billion.

Revenue for the fiscal second quarter benefitted from strong growth in Microsoft Cloud and other cloud services.3 Microsoft also noted in its quarterly filings that the COVID-19 pandemic continues to have an impact on its business operations and financial results, but that some of the effects have lessened. The company said that its commercial and consumer businesses have benefitted from demand for its cloud and productivity tools.

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.5

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 the commercial and consumer divisions. The segment also includes business solutions products such as dynamics, as well as the professional networking site, LinkedIn.5

In Q2 FY 2022, productivity and business processes generated $15.9 billion in revenue, comprising 31% of Microsoft’s total revenue. This amounted to an increase of 19.3% from the year-ago quarter. Operating income for the segment grew 24.4% YOY to $7.7 billion in Q2 FY 2022, accounting for less than 35% of the total.6

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 Azure, SQL Server, Windows Server, GitHub, Enterprise Services, and more.5

For Q2 FY 2022, Intelligent Cloud generated $18.3 billion in revenue, accounting for over 35% of total revenue. Up 25.5% compared to the year-ago quarter, Intelligent Cloud was the fastest-growing revenue segment in the company’s fiscal second quarter. It was also the fastest-growing segment in terms of operating income, which was up 26.3% YOY to $8.2 billion. Intelligent Cloud operating income accounts for just under 37% of Microsoft’s total operating income, making it the most profitable of the company’s three segments.6

More personal computing

Microsoft describes its more personal computing segment as consisting of products and services aimed at putting “customers at the center of the experience with our technology.” The Windows operating system, surface device, gaming products, and search and news advertising are all included in this segment.

In Q2 FY 2022, more personal computing generated $17.5 billion in revenue, comprising about 34% of total revenue. While revenue grew 15.5% YOY for the segment, operating income rose 21.8% YOY to $6.4 billion. More personal computing accounts for about 29% of the company’s total operating income.6

Microsoft’s Recent Developments

On Jan. 18, 2022, Microsoft announced a plan to acquire video game developer Activision Blizzard for $68.7 billion. The deal is expected to close in fiscal year 2023. According to Microsoft, the acquisition will make it the third-largest gaming company by revenue, behind only Tencent and Sony.7

How Microsoft Reports Diversity and Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Microsoft and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Microsoft releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

By: Nathan Reiff

Source: How Microsoft Makes Money: Computing and Cloud Services

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