Scaling Up: Microsoft’s Growing Revenue and Expanding Margins

28 April 2023

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Source: Iress

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Scaling Up: Microsoft’s Growing Revenue and Expanding Margins

Microsoft, one of Lunar Capital’s holdings, provides a strong example of a business whose growth has resulted in expanding margins. For the most recent quarter, Microsoft recorded a gross margin of 69% and a net margin of 35%. In comparison, during Microsoft’s 2018 financial year, they recorded a gross margin of 65% and a net margin of 15%. On top of the expanding margins, Microsoft has been growing its revenue too. Microsoft has three primary business segments: Productivity and Business Processes (Office products and other tools), Intelligent Cloud (Azure and other cloud services), and More Personal Computing (Windows operating systems.)

One of the factors that has contributed to Microsoft’s expanding margins is their ability to bundle products together. Microsoft Teams demonstrates how Microsoft leveraged their scale and product reach to encourage businesses to use their products instead of alternatives like Zoom. During the pandemic, Microsoft bundled their Teams’ product with Office 365, allowing companies to access both products without having to pay for an additional service. This bundling strategy helped Microsoft increase their market share and strengthen their position in the productivity services space.

The Intelligent Cloud segment is another example of how Microsoft has successfully scaled its operations and improved its margins. It has been the fastest-growing segment in terms of revenue and operating income between 2018 and 2022, with the operating margin increasing from 36% to 43% during this period. Microsoft has also leveraged its scale to encourage businesses to use its cloud products, which are designed to be easily compatible with the company’s other products and services.

Companies that can rapidly scale and improve their margins, often attract intense competition. Microsoft is not only competing against Amazon and Alphabet in the cloud space but also against smaller companies, such as Slack and Canva, that specialize in specific products. Microsoft is also entering the AI space where they are competing against Alphabet and other companies. Microsoft plan to integrate ChatGPT into their Office 365 products, such as Word, Excel and PowerPoint. If executed well, this could allow Microsoft to further build on their large network to increase their dominance in the computing space.

Microsoft and Amazon are held in the Lunar Capital BCI World Wide Flexible Fund.