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Here's How Microsoft Makes Its Money

By Ashraf Eassa – Updated Apr 11, 2019 at 11:09AM

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Ever wonder where the tech titan's fat profits come from? Look no further.

Microsoft (MSFT 0.07%) is an incredibly lucrative company. During its fiscal 2018, which ended on June 30, 2018, Microsoft turned in $110.36 billion in revenue and operating income of $35 billion, figures that were up 14.3% and 20.8%, respectively. 

Here, I'd like to break down the major components of Microsoft's business to help you better understand just how the software giant makes its money.

Microsoft's logo.

Image source: Microsoft.

Three major reporting segments

Microsoft's product portfolio is absolutely vast, but in order to keep things manageable, the company sorts its product offerings into three major reporting segments. 

The first is its productivity and business processes segment, which includes its Office and Dynamics product lines, as well as LinkedIn (acquired back in 2016). Second is its intelligent cloud segment, which encompasses the company's server products, cloud services, and enterprise services offerings. And, finally, there's the company's more personal computing business, which includes heavy-hitters like its Windows licensing revenue and Xbox-related revenue, as well as the revenue from its Surface family of products. 

Here's Microsoft's revenue and operating income breakdown by segment for its fiscal 2018:

Segment FY 2018 Revenue (in Millions) Revenue % of Total FY 2018 Operating Income (in Millions) Operating Income % of Total
Productivity and business processes $35,865 32.5% $12,924 36.9%
Intelligent cloud $32,219 29.2% $11,524 32.9%
More personal computing $42,276 38.3% $10,610 30.3%
Total $110,360 100% $35,058 100%

Data source: Microsoft 10-K filing. Percentages may not add up to 100% due to rounding.

As you can see, Microsoft's revenue and operating income by segment were fairly evenly split -- each segment is a large and important contributor to the company's overall business. 

Now, Microsoft's fiscal 2019 isn't over yet, but it's also worth looking at what the company has reported so far for each segment during the fiscal year: 

Segment H1 FY 2019 Revenue (in Millions) Revenue % of Total H1 FY 2019 Operating Income (in Millions) Operating Income % of Total
Productivity and business processes $19,871 32.3% $7,896 39.1%
Intelligent cloud $17,945 29.2% $6,210 30.7%
More personal computing $23,739 38.6% $6,107 30.2%
Total $61,555 100% $20,213 100%

Data source: Microsoft 10-Q filing. Percentages may not add up to 100% due to rounding.

In the first half of 2019, the percentages of each business's contribution to the company's total revenue and operating income didn't change relative to the full-year 2018 results, even though the magnitudes of those contributions changed slightly. It's also important to understand that there are seasonal factors at play, so the percentage contributions of each business during the first half of 2019 might not tally exactly with what the full-year results will ultimately be.

Check out the latest Microsoft earnings call transcript.

Investor takeaway

Microsoft is a diverse business that allows investors to gain exposure to a wide array of compelling technology trends. Indeed, Microsoft allows investors to participate in the stabilization of the PC market, the continued secular growth in gaming, the booming cloud computing market, and the ongoing need for productivity software. Oh, and if you were a fan of LinkedIn before it was acquired by Microsoft, owning Microsoft shares get you exposure to that business, too. 

The company is one of the most -- if not the most, depending on the day -- valuable technology companies for a very good reason, and investors looking to bet on a best-in-breed technology giant with many growth irons in the fire would be wise to give Microsoft a close look.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of Microsoft. The Motley Fool has a disclosure policy.

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