If you followed Congress’ scrutiny of the technology industry this week, you would think that Amazon, Google and Facebook are the biggest tech companies around. But Microsoft is the sector’s quiet giant. It is not only the largest tech company, but it is the largest publicly traded company of any kind, with a market capitalization of more than $1 trillion.
The company is set to report earnings on Thursday after several strong quarters and upbeat recent remarks by Microsoft’s traditionally conservative leaders. Analysts expect the company to report $32.8 billion in sales and $9.4 billion in profit for its most recent quarter, according to the research firm FactSet. Results like that would indicate large companies are still investing in new technology, shrugging off concerns about the continuing trade war between the United States and China and the potential for a broader economic downturn.
“The biggest debate is at $1 trillion, how can you get bigger from here?” said Jennifer Lowe, an analyst at the investment bank UBS.
What’s the main driver of Microsoft’s business?
At its core, Microsoft’s primary customers are other businesses and organizations, and the company is betting its future that they will keep moving their tech needs into the cloud.
Most investors keep a close eye on how quickly Microsoft’s core cloud-computing product, Azure, has grown. Many of them hope to see Azure have a growth rate over 70 per cent compared with the previous year, maintaining its rapid pace of expansion even as the business gets bigger.
“We estimate it’s going to be about $13 billion in revenue, and it’s growing about 72 per cent,” Lowe said, using annual figures. “That pace of growth, at that scale, is pretty unprecedented.” (By comparison, Amazon’s cloud business had about $28 billion in sales in the past four quarters, up 46 per cent.)
Amazon, the cloud-computing leader, is the provider of choice for digitally native companies like Netflix, but Microsoft has found traction with traditional large corporations and organizations, Lowe said.
Why is the cloud business growing?
Microsoft has been pushing the adoption of cloud service beyond the simple storing of information in remote data centres. It has persuaded corporate customers to employ cloud computing to transform how they do business using tools like artificial intelligence, and to connect workers on retail sales floors and assembly lines to corporate technology.
In traditional set-ups, when companies ran their own servers, it was hard to upgrade and add new functions. “Every time you wanted to do something new, you had to buy new hardware,” said Sid Parakh, a portfolio manager in Seattle at Becker Capital, which invests in Microsoft. “With cloud, you have as many capabilities as you want overnight.”
One Microsoft metric – known by the long, wonky name of server products and cloud services revenue growth – provides clues about whether that approach is taking hold. It lumps together sales for traditional data centres and cloud services, and last quarter it was up 29 per cent over the previous year. That it is growing at such a fast clip suggests the cloud business is not just taking old revenue and moving it online.
Last week, Microsoft announced a deal with the Providence St. Joseph Health system that is geared toward collecting health data from different sources in one place, using artificial intelligence to improve results for patients and connecting more than 100,000 caregivers to one another. This week, it announced a deal with AT&T.
That wonky metric is also a sign of what is known as a hybrid approach to cloud computing, where big organizations keep some information on their own servers and some in the cloud, using a single set of tools to work on it all. Such an approach eases companies’ transition to the cloud, and is a particular strength for Microsoft.
What about Microsoft’s consumer business?
Microsoft still sells Windows and Office software to consumers, and some of its Surface tablet and laptop sales also target individual customers. But the most interesting part of its consumer business is gaming.
The past fiscal year has been odd for Microsoft’s gaming business, in part because it is overdue for a new Xbox gaming console (the company recently announced that one would be out for the 2020 holiday season). In the long term, Microsoft is working to become a hub for players to stream games live from the cloud. It went so far as to enter a partnership with Sony, which makes a competing console, under which the companies will work on online entertainment together.
A year ago, Microsoft’s gaming business did particularly well on the success of Minecraft. The company cautioned investors that this past quarter, gaming might not be as strong.