Annual Report Project – Section 2

Running Head: MICROSOFT 10-K: MANAGEMENT DISCUSSION AND ANALYSIS 1

MICROSOFT 10-K: MANAGEMENT DISCUSSION AND ANALYSIS 2

Annual Report Project: Microsoft 10-k Management Discussion and Analysis (MD&A)

Lakisha Trammel

Dr. E. Gregory

GUC

ACC-616-0500 Financial Research and Compliance

August 26, 2020

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 influenced 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. Comment by Elaine Gregory: I am guessing that these are your 4 key issues? So, what I would expect to see based on the Loom presentation is about a paragraph or two on each including the page number so that we can go back and review them. But, you should start out with an overview of what the MD&A is (it doesn’t represent a ‘true account’ of the financial operations). The MD&A Comment by Elaine Gregory: It is ? Comment by Elaine Gregory: Try not to overuse a word in a sentence. According to Microsoft (YYYY) [what] will be influenced by the introduction of AI products such as Azure. See how you can revise sentences to be much more cohesive and less wordy?

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. Comment by Elaine Gregory: I am not sure where any of this fits in the assignment. You were to discuss the 4 key issues and then analyze whether the results align with the narrative of the MD&A and if not what would add to the clarity?

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 Comment by Elaine Gregory: Thank you for formatting your references using the hanging indent. Please review the examples in my Loom Presentations on how to properly list your references in APA 6th edition format. Each of these references contains errors to correct. If you are unsure, please reach out to me.

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

Microsoft, (2019). Annual Report 2019- Satya Nadella, Chief Executive Officer. Retrieved from https://www.microsoft.com/investor/reports/ar19/index.html

Nadella, S., & London, S. (2018). Microsoft’s Next Act. The McKinsey Quarterly.