Microsoft, a company once sentenced to “death penalty” by reviewers, returned to supremacy after being in a position of weakness for more than 10 years.
On July 18, Microsoft announced its fourth quarter of the 2019 fiscal year and the 2019 financial year performance report. In this report, Microsoft’s fiscal year revenue exceeded $125.8 billion, an increase of 14%. The net profit was $39.2 billion, an increase of 137%. In the fourth quarter, its revenue was $33.7 billion. Revenue from productivity and business processes, smart cloud, and so on, has surpassed its traditional, more personal computing business (Windows).
Behind this growth is the result of five years of reform and innovation by its current CEO, Satya Nadella.
When the once giant Microsoft entered the “middle-age crisis”, Satya Nadella was in danger and actively planned the transformation while ensuring the advancement of the original Windows business. Through this transformation, businesses such as Dynamics (Intelligent Business Applications) and Office (Office Software) achieved strong growth. In addition, after taking office, he decisively proposed the development of emerging industries such as cloud computing and artificial intelligence. Bill Gates commented that Nadella is bold and innovative, bringing Microsoft into the field of artificial intelligence, cloud computing and other technologies, which is an excellent choice.
In December 2018, after 10 years of weakness, Microsoft’s share price stood at $113. The company briefly reached the top global market capitalization. After the release of the earnings report, Microsoft’s share price once reached a high of 140.6 US dollars, with a market value of 1.04 trillion US dollars, surpassing Amazon and Apple, and becoming the world’s highest market value company.
How did the scarry Microsoft come back?
From the full-year financial data, Microsoft’s total revenue in FY 2019 reached US$125.8 billion, up 14% year-on-year. The net profit was US$39.2 billion, up 137% from US$16.57 billion in the previous fiscal year.
In the full fiscal year, the biggest contribution to its revenue is more personal computing business, with a full fiscal year revenue of $45.7 billion. This was followed by productivity and business processes, with full fiscal year revenue of $41.2 billion. The smart cloud business brought in a revenue of $39 billion. However, in terms of growth, more personal computing business increased by 3.4 billion US dollars compared to the previous year. Additionally, productivity and business process and smart cloud business revenue increased by 5.3 billion US dollars and 6.8 billion US dollars respectively.
Specifically, productivity and business process revenues, including Office products, LinkedIn, and Dynamics products, were $11 billion, a 14% increase. Office 365 and Dynamics 365 have the highest revenue growth, both revenue growth rates are more than 30%. Smart Cloud revenue was $ 11.4 billion, an increase of 19% over the previous quarter. Microsoft Azure has the fastest growth rate was 64%. In comparison, its traditional more personal computing business generated revenue of $11.3 billion.
In contrast, while Microsoft is holding more personal computing businesses, its new businesses such as productivity, business processes, and smart clouds are showing strong growth. According to financial report data, in the same period of FY18, its personal computing business revenue was US$10.8 billion. The revenues from productivity and business process and smart cloud were all around US$9.6 billion. In the fourth quarter of FY2019,the three business incomes have been Parallel, the smart cloud business even exceeded the revenue of the Windows business for the first time.
In the cloud computing business, Microsoft’s main competitor is Amazon. According to data from technology market research firm Canalys, Amazon’s cloud computing division dominates the cloud computing industry with a global market share of 32.8%. Microsoft’s market share is 14.6%, while Google’s market share is 9.9%. Even some analysts said that in the past fiscal year, the growth of cloud computing business has become a key driving force for Microsoft to break through the market value of trillions of dollars.
There are indications that today’s Microsoft has implemented a digital transformation from traditional PC operating system service providers. Relying on the layout of cloud computing and artificial intelligence has entered the era of intelligent cloud and intelligent advantages.
Even after Satya Nadella saw the transcript, the words also revealed excitement. In a conference call after the release of the earnings report, he said: “I am proud of what I have achieved in the past 12 months and are energetic for the great opportunities of the future.”
Affected by earnings reports, Microsoft shares rose 1.3% in after-hours trading to $138.26. After the opening on July 19, Microsoft’s share price even rose to a high of $140.6. Its current market value is 1.04 trillion US dollars.
However, this does not mean that Microsoft can rest easy. In a conference call, in response to analysts’ questions about the future growth trend of Microsoft’s smart cloud business, Microsoft Chief Financial Officer Amy Hood said that in the long run, the company’s smart cloud business gross margin growth is still under pressure. This is because there is an increase in the likelihood of spending on after-sales technical services. In the first half of the year, the implementation was very good and may be offset. Azure’s gross margin has improved.
“Firefighting Captain” took office, gigantic transformation happened
In 2007, Paul Graham, co-founder of Silicon Valley startup incubator Y Combinator, wrote an article whose title was “Microsoft is Dead.” In his post, he believed that although Microsoft is still making money, no one is afraid of it.
At the time, 32-year-old Microsoft was facing a grim situation. In the first 30 years, Microsoft pioneered the PC era with the Windows operating system and monopolized the operating system market. There is even a saying that Yahoo’s failure stems from a strategic misstep, and Yahoo has limited its position to the media because it is “frightened by Microsoft.”
In 2000, Bill Gates’ close friend Steve Ballmer took over as Microsoft CEO. He was fully responsible for Microsoft management. However, under the control of Ballmer, Microsoft was not fast enough in the mobile field. In the process of transforming to mobile devices, the limelight has been dominated by Google and Apple.
At this time, Microsoft is at an unprecedented low. The company’s smartphone business is strangled by Apple and Google. The cloud computing industry is dominated by Amazon. Bing search continues to burn money. Windows 8 has become one of the most criticized operating systems in Microsoft history. The acclaimed Office is bound by Windows…
When Paul Graham’s article, “Microsoft is dead” was circulated on the Internet, the market value of Apple and Amazon surpassed that of Microsoft. The Microsoft, which was boosted by the monopoly of Windows, became weaker.
After the launch of mobile Internet, smartphones became mainstream. Microsoft began to be forgotten. In September 2013, Microsoft acquired Nokia’s equipment and services division for $7.2 billion. However, the acquisition did not make Microsoft’s mobile business look good.
On the year 2013, 57-year-old Ballmer decided to retire early. Ballmer said that during the 14 years at Microsoft’s helm, the biggest mistake was the failure to transition from software to hardware in time.
In February 2014, Satya Nadella, executive vice president of Microsoft’s cloud computing and enterprise division, took over the baton of Microsoft CEO and became the “firefighting captain”, opening a drastic change.
Nadella prefers British governance. After taking office, he repositioned Microsoft. He positioned Microsoft as a cloud platform company that boosted productivity around the world. He only looked at three things: Windows, Office 365, and Azure.
In fact, even when Microsoft is at a low point, it is still making money, thanks to the super sticky nature of Microsoft products. On one hand, Windows system is still the first choice for desktop users, with a market share close to 90%! On the other hand, regardless of the enterprise or individual, whether the system is Windows or iOS, users are inseparable from Microsoft Office software, especially the core “three major Pieces” – Word, Excel and PowerPoint.
Nadella has transformed Office from a simple computer software into a complete office productivity promotion service, which stimulates the company’s desire to buy, and replaces the single charge with monthly and annual fees, and revolutionizes the way Office sells.
Since then, Office 365 has become one of Microsoft’s fastest growing products, accounting for about one-third of Microsoft’s total revenue.
In 2018, Microsoft also introduced the Microsoft 365 product package that integrates Windows, Office 365, and enterprise security and mobile services. The “cloud platform company that boosts productivity” in Nadra’s vision has taken shape.
From the earnings report released this time, the 31% growth rate is enough to see the growth drivers of Office products.
Under this positioning, Microsoft is no longer suffering from missed hardware opportunities. Nadella cut off Microsoft’s excessive investment in consumer hardware that is not good at it.
In July 2014, Satya Nadella announced that Microsoft will cut 18,000 jobs in the following year. About 12 million employees will be laid off from Nokia’s equipment and services department, roughly half the total number of employees in the department.
Since then, Microsoft has been downsizing several times. By mid-2017, Microsoft has laid off 26,000 people. The Nokia equipment and services department acquired by Microsoft has been dismissed, and the mobile phone business marginalized.
Betting on cloud computing and AI, Microsoft is practically “returning to life”
What makes Microsoft “return to life” is its focused development of smart cloud business.
In late May 2017, Microsoft Build 2017 Developer Conference was held in Seattle. On the first day of the conference, in addition to the CEO’s keynote speech, two global executive vice presidents of Microsoft Cloud Services and Artificial Intelligence Affairs also gave a keynote speech. According to the past practice, this session must have a seat in the Windows department. This time, not only is the vacancy, the core product Windows has not even appeared, which is the first time in the 7-year history of the Build Conference. Microsoft CEO Nadella only mentioned at the beginning of the theme speech that Windows10’s monthly active devices have reached 400 million.
This is not to say that Windows is no longer important. In fact, Windows with about 1 billion users is still the most important channel for Microsoft services. And in the second quarter of 2017 (four quarters of the fiscal year), the personal computer business still ranked first in the business with a revenue of 8.8 billion US dollars. However, PC business performance for the quarter fell 2% year-on-year, while cloud platform Azure quarterly revenue jumped 97% year-on-year. Business cloud applications such as Dynamics 365 and Office 365 reported revenues of $8.4 billion, up 23% year-on-year.
This means that within Microsoft, Windows primacy has gradually been overtaken by Office and cloud.
Before the birth of cloud computing, the server was a painful name for Internet companies. Cloud computing helps companies move data storage and system construction from traditional self-sustaining servers to online cloud storage. This not only frees up physical space, but also significantly reduces business costs.
The potential of cloud computing has long been valued by the industry. In 2008, The Economist predicted that cloud computing would revolutionize the Internet industry.
This year (2008), Ballmer announced that he wanted to fully develop the cloud business, with R&D investment of up to 8.7 billion US dollars. However, the company lacked a vision for the cloud business. In the early stage, the profitability of the business was average.
Fast forward to 2013. Amazon’s AWS has been born for seven years. The first batch of cloud products has been launched for two years. It is unmatched in the cloud computing field. AWS’ monopoly position is like Microsoft’s operating system.
In the same year, Satya Nadella was responsible for the cloud computing business. “This may be your last job at Microsoft. If it fails, there is no parachute, you might crash with it.” This is Ballmer’s advice and warning to Nadella.
In the following years, Microsoft’s cloud computing business is still flat. A strange phenomenon is that inside Microsoft, on the one hand, department heads will say, “This is cloud business, we should hatch it”. On the other hand, Microsoft employees have sense of insecurity. They do not know whether the cloud business can reach the peak of commercial success. A few years later, Microsoft’s cloud service revenues are still only a few million dollars.
After taking office, Satya Nadella set a strategy for “mobile first, cloud first” for Microsoft. According to the report of AI Finance and Economics, at that time, Nadella brought together more than 100 engineers from the team to tell everyone that the department’s business should be turned to cloud business. But in fact, many people disagree. There are many projects related to equipment in the hands of everyone.
Many people ask, what should I do if I make a mistake? Nadella replied: Give me a year, if it is wrong, then we will go back.
In the end, everyone accepted it with suspicion, and Nadella persuaded the team.
After transforming the cloud business, Nadella also proposed that Microsoft should use artificial intelligence to redefine all of Microsoft’s business. For example, all Office products are artificially intelligent. PowerPoint not only adds automatic translation, but also automatic descriptions of pictures. As for Microsoft’s transformation of key cloud services, including cognitive services in Azure cloud services, it is also closely related to artificial intelligence.
After missing the best development period of the mobile Internet, Microsoft did not miss the era of cloud and artificial intelligence. This time, its transformation has stepped on the rhythm.
Today, Office and cloud computing business account for more than 60% of Microsoft’s profits,. This is a well-deserved cash cow. This is also reflected in this financial report. The intelligent cloud business has an annual revenue of 39 billion US dollars, which is comparable to the income of the other two businesses. Especially in the fourth quarter, the smart cloud business exceeded the revenue of the Windows business for the first time.
According to data from technology market research firm Canalys, in the cloud market, Microsoft’s cloud business ranks second only to Amazon’s AWS. The Windows business, which used to be the main force of making money, has gradually relegated to the second line. From the perspective of revenue composition, Microsoft has completely become another company.
On the day of Satya Nadella’s appointment, Microsoft’s share price closed at $36.35. Today, five years later, Microsoft’s share price has risen to nearly $140, nearly three times.