As in past years, all information in this report is taken from Microsoft’s publicly available 2013 10-K filing. Numbers may vary from past reports. When Microsoft moves products between revenue categories, they retroactively adjust the totals for past years so that year-to-year comparisons are accurate. This article uses 2011 and 2012 values as calculated in the 2013 report. All values are in USD.
If you’ve read my past reports, feel free to skip down to the charts. If this is your first time here, let me provide a quick explanation of how Microsoft breaks down its earnings.
Microsoft 2013 earnings tl;dr (“too long, didn’t read”)
- Microsoft remained highly profitable in 2013, with solid year-over-year growth in both revenue and operating income.
- The Business (Office) division brings in significantly more money than the Windows division (+30% revenue, +70% profit). In fact, nearly half of Microsoft’s 2013 profits came from the Business division alone.
- For the first time ever (to my knowledge), the Windows division was actually 3rd in revenue in 2013, behind both Business and Server/Tools. If trends from the past four years continue in 2014, Server and Tools will pass Windows in not just revenue, but profitability as well.
- Regardless of division, the vast majority of Microsoft’s profits come from business and OEM sales. Consumer-centric divisions (including XBox, Windows Phone, Bing) are largely irrelevant from a profit standpoint.
- Just for fun: in 2012, Apple pulled in double the revenue of Microsoft ($156 billion USD and $74 billion, respectively). Source 1, Source 2.
Microsoft is unique among tech companies for reporting detailed information by product line. Their competitors do not provide such a detailed breakdown; Apple, most notably, is organized around “functional” divisions rather than “product” divisions, making direct financial comparisons between Apple product lines and Microsoft product lines difficult.
This year, Microsoft announced a company-wide reorganization plan that would bring them closer to Apple’s structure. Many (myself included) have doubts about this resulting in meaningful changes to Microsoft’s overall structure and performance, but there is one area the reorganization is almost certain to impact: financial reporting. Sadly, this means that 2013 may be the last year I am able to provide detailed earnings charts by product division.
There are many theoretical benefits to organizing a company by “function” instead of “products.” One benefit is reduced infighting between product groups, a known problem for Microsoft. Another benefit is the ability to hide losses due to underperforming products. Microsoft had its share of those in the past year, most notably its billion-dollar loss on the Surface RT line of tablets, the impact of which can be seen in the charts below.
Microsoft Total Revenue and Operating Income (June 2012 – June 2013)
Total Revenue: $77,849,000,000
Operating Income: $26,764,000,000
Total Revenue is the total amount of money Microsoft takes in from normal business operations.
Operating Income is calculated as “Operating Revenue – Operating Expenses”. In other words, Operating Income is the profit made from normal business operations. (A more detailed definition is available from Investopedia: “Operating income would not include items such as investments in other firms, taxes or interest expenses. In addition, nonrecurring items such as cash paid for a lawsuit settlement are often not included. Operating income is required to calculate operating margin, which describes a company’s operating efficiency.”)
Operating Income is particularly important when looking at a company like Microsoft. Certain Microsoft divisions take in a great deal of money, but they also require much higher costs to operate. Thus it is relevant to look at not just how much money a certain division brings in, but at how efficiently that division generates its revenue.
Microsoft Revenue and Operating Income by Division (June 2012 – 2013)
Microsoft products (and earnings) are divided into five divisions: Windows, Microsoft Business, Server and Tools, Entertainment and Devices, and Online Services. The types of products and services provided by each segment are as follows.
- Windows – Windows operating system, Windows-related web services (including Outlook.com and SkyDrive), Surface RT and Pro devices, and Microsoft PC hardware products. 65% of Windows Division revenue comes from OEM sales of Windows.
- Microsoft Business – Microsoft Office (including Office Web Apps and Office 365), Microsoft Exchange, Microsoft SharePoint, Microsoft Lync, Yammer (newly acquired in 2012), Microsoft Office Project and Office Visio, and Microsoft Dynamics ERP and CRM. As you’d expect, 85% of Microsoft Business revenue comes from businesses.
- Server and Tools – Windows Server operating system, Windows Azure, Microsoft SQL Server, Windows Intune, Windows Embedded, Visual Studio, System Center products, Microsoft Consulting Services, and Premier product support services. 80% of Server and Tools revenue comes from direct product sales via volume licensing, OEMs, and retail packaged products.
- Entertainment and Devices – Xbox 360 console, games, and accessories (e.g. Kinect), Xbox LIVE, Windows Phone, and Skype.
- Online Services – Bing, Bing Ads, and MSN.
(Note: these divisions are pretty much identical to 2012, with the exception of Microsoft’s $1.2 billion purchase of Yammer and its corresponding addition to the Microsoft Business division.)
Here are the 2012-2013 revenue and operating income values for each division, in USD. Note that the number in parentheses is the percentage change between 2012 and 2013.
Windows (including Surface tablets and other hardware)
Revenue: $19,239,000,000 (+5%)
Operating Income: $9,504,000,000 (-18%)
Business (Office, Exchange, SharePoint)
Revenue: $24,724,000,000 (+3%)
Operating income: $16,194,000,000 (+2%)
Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $20,281,000,000 (+9%)
Operating Income: $8,164,000,000 (+13%)
Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $10,165,000,000 (+6%)
Operating income: $848,000,000 (+120%)
Online Services (Bing, MSN, Hotmail)
Revenue: $3,201,000,000 (+12%)
Operating income: $-1,281,000,000 (*)
(* – Microsoft had an artificially huge loss in the Online Services division in 2012, due to a one-time goodwill impairment charge of $6.2 billion. This makes year-to-year comparisons meaningless.)
Microsoft Total Revenue – 2013
Microsoft Operating Income – 2013
Year-over-year comparisons (2010-2013)