Annual Report Project - Section 3

Microsoft 10-k Management Discussion and Analysis (MD&A)

In the MD&A of the 2019 annual report, Microsoft highlighted various factors such as increasing revenues, a potential rise in market-share due to new product (Azure), stiff competition and emergence of artificial intelligence (AI) as the main factors influencing its future business viability. According to Microsoft, the future will be influence by AI and its confident it will expand its market share due to its new product called Azure. Microsoft is also anticipating increased revenues due to new devices and internet users who are anticipated to connect to its cloud computing services. Given that it commands the world’s largest cloud computing services, Microsoft expects to control the AI market however stiff competition especially from Amazon remains its main bottle-neck. The MD&A believes Amazon still owns a valuable market-share in the cloud computing services and AI and could face potential cloud wars that would impact its future income.

I believe that the MD&A represents a true account of financial operations at Microsoft given that it concludes that Microsoft is financially stable with a favorable future income. According to Microsoft, the Fiscal year 2019 was a breakthrough year in which it made more than $125 billion in revenue, $43 billion in operating income, while its shareholders received more than $30 billion. This implies a financially stable firm with adequate income and returns to its investors. Microsoft’s future revenues are also guaranteed because it has the world’s largest commercial cloud business, with over $38 billion in annual revenues, while its gross margin could expand to over 63% (Nadella, & London, 2018). This data agrees with Microsoft’s MD&A, however, its facing stiff competition mainly from Amazon, Apple, and Google.

Being one of the Fortune 50, Microsoft is exposed to stiff competition. To deter competition, it built the Azure, which is the world’s only cloud-edge-services computer. The company therefore enjoys a competitive edge in that more than 95% of the Fortune 500 trust and use Azure (Nadella, & London, 2018). There’s also increasing volume of data with over 50 billion devices expected to be online by 2030 and since Azure is the only cloud with limitless data, Microsoft will own the majority market-share and is assured of future revenues (Fitchett, 2019). The company must however anticipate competition. Microsoft believes that despite the anticipated success due to Azure, there’s a looming cloud war. By the third quarter of Fiscal 2020, Amazon still owned 40% of the cloud services market compared to Azure’s 20% share while there’s slow growth in Azure’s market share (Fitchett, 2019). Despite high hopes for Azure, Amazon may claim dominance for a while thereby impacting Microsoft’s anticipated revenues.

In conclusion, despite a huge market share and anticipated income due to Azure, the MD&A report implies that Microsoft’s future income is mainly linked to Azure's success. As such, Amazon's continued dominance including competition from other firms would reduce Microsoft’s future income. I therefore agree that the MD&A represents an accurate financial account at Microsoft given that investors must trade carefully as Microsoft’s success may be solely linked to Azure’s success.

References

Fitchett, L. (2019). A Strategic Audit of Microsoft Azure.