INSIGHTS

WEEKLY COMPANY INSIGHT: MICROSOFT

Roy Davidson, 31 January 2019

microsoft

Description

Microsoft (MSFT) is a leading maker of enterprise and consumer software products. The company is most known for its Windows operating system, which is used on more than a billion computers globally. MSFT is also well known for its Xbox gaming console and its internet business with interests in online search (Bing), display advertising and online content.

Global software leader

MSFT develops, manufactures, licenses and supports software products. The company offers operating system software for computing devices, servers, phones, and other devices (primarily Windows), server application software (Microsoft SQL Server and Visual Studio), cloud services (Azure), business and consumer applications software (Microsoft Office, Dynamics, Outlook, OneDrive, and Skype), software development tools, and Internet and intranet software (Bing search engine, MSN and SharePoint). MSFT also develops mobile phones (Nokia) and video game consoles (Xbox) and generates revenue through transactions, subscriptions, and advertising and the sale of first party video games and third-party video game royalties.

Cloud computing focus

MSFT’s new CEO, Satya Nadella, has placed much more emphasis on growing the company’s cloud computing business, Microsoft Azure. MSFT does not break out specific financials for its Azure business and instead discloses it within its Commercial Cloud segment, which includes its other cloud-based services Office 365 and Microsoft Dynamics. MSFT’s Commercial Cloud segment comfortably surpassed management’s target set out in 2014, of US$20bn in annualised revenue by the end of 2018 and revenue shows no sign of slowing with Azure reporting an acceleration in growth over the fourth quarter of 2017.

Significant captive audience

MSFT’s biggest advantage is its ability to leverage off its massive base of enterprise clients. Consulting and business partners, who sell MSFT’s cloud services to their client base, have found that existing MSFT customers have more interest in Microsoft Azure because of their long-term relationship with the company. Given that customers already use MSFT software, the shift to Azure is much easier. MSFT will then be able to up-sell these customers new premium Azure hosted services that can be up and running with a few clicks. MSFT’s other edge over competitors is that it’s already a major software-as-a-service vendor which includes Dynamics, Office 365 and recently acquired LinkedIn.

Investment view

Management’s move into the cloud infrastructure sector in 2013 marked a significant turning point for the company and its revenue growth has accelerated ever since. As revenue growth improved, MSFT was been able to maintain its industry leading operating margins, despite a lot of skepticism from investors. Management’s upbeat outlook for FY19 indicates a strong IT spending environment, particularly for its cloud-based services.

Risks

  1. economic slowdown
  2. regulatory risk
  3. increased competition
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