Microsoft (MSFT +1.08%) 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.
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.
