Microsoft: it’s not just about the cloud – business services are driving profits

Vittorio Carlini

On the one hand, quarterly results that exceeded consensus estimates, yet the share price reacted negatively. On the other hand, there is the growing influence of the Productivity & Business Processes (PBP) division, which has become increasingly significant in recent years. These are two of the key features that characterise the current situation at Microsoft Corp. Two ‘conditions’, one of which (the first) is well known to the market, whilst the other is – mistakenly – left in the background.

To understand this – with regard to the second aspect – one need only look at the trends in the market share of the various business areas of the company founded by Bill Gates. The company divides its operations into three major segments. The first, as the name suggests, is the PBP. This includes the Microsoft 365 platform (which integrates applications such as Word, Excel, PowerPoint and Outlook, as well as cloud services such as Teams and OneDrive), Dynamics 365 and the social network LinkedIn. The second, on the other hand, is the so-called Intelligent Cloud (IC). That is to say: cloud computing and infrastructure services for businesses. This segment encompasses Azure, SQL Server and tools for data management, security and Artificial Intelligence (AI). Finally – as the third division – there is the More Personal Computer (MPC). This division encompasses Windows, Surface devices, Xbox (video games), Bing (search engine) and associated advertising, as well as services for hardware manufacturers. In short: the three divisions represent, respectively, software productivity (linked in particular to businesses), the cloud and Microsoft’s consumer sector.

Well, according to the Bloomberg terminal, the PBP for the 2018–2019 financial year stood at 32.5 per cent of adjusted turnover. This proportion remained more or less stable until 2021–2022 (31.9 per cent). It then rose, however, reaching – after some ups and downs – 42.8 per cent in 2024–2025. On closer inspection, the same pattern is evident in terms of adjusted profitability. Again in 2018–2019, business-to-business products generated 37.7 per cent of EBIT. Subsequently, in 2022–2023, there was a sharp rise in this proportion (56.57 per cent), which in the last financial year (ending 30 June 2025) settled at 54.3 per cent. One might object: even the ‘legendary’ world of cloud computing – alongside the slowdown in MPC – has grown. True. However, the trend is more stable: in 2018–2019 it accounted for 30.9 per cent of turnover and, as at 30 June this year, it accounted for 37.7 per cent of adjusted turnover. With regard to EBIT – again, on an adjusted basis – the figure rose from 32.4% (2018–2019) to 39.2 per cent (2021–2022) before ‘settling’ at 34.7 per cent in the last financial year.

In other words: Microsoft has fundamentally transformed its business model, shifting the focus of its revenue generation from the traditional logic of personal computing to a model centred on enterprise productivity and the native integration of Artificial Intelligence (AI) into companies’ operational workflows. In this regard, the Microsoft 365 suite has been transformed into a comprehensive management ecosystem, combining productivity, communication, security and automation tools. But that’s not all. The widespread adoption of Teams, the growing penetration of Dynamics 365 into business management systems, and the advertising and premium monetisation of LinkedIn have bolstered recurring revenue. In economic terms, this division benefits from a very low marginal cost structure: once the platform has been developed, each additional user generates high incremental margins. The expansion of Microsoft 365 Commercial and Dynamics 365 – which grew by 17 per cent and 20 per cent year-on-year respectively in the first quarter of the 2025–2026 financial year, according to the group’s figures – confirms the robustness of the model. A model that has long been complemented – and not just recently – by cloud computing. That is to say, the area under close scrutiny by all analysts. Of course, this focus is justified (in part) by the fact that cloud computing provides the high-tech infrastructure and services needed to develop and scale AI. Consequently, every move made by the division must be scrutinised closely. Particularly with regard to the risk surrounding the return on the massive investments budgeted by the company. That said, however, it does not seem entirely fair to ‘forget’ the current main driver of profitability: that PBP, to which, incidentally, Copilot is also attributed. Namely: the Redmond-based group’s AI assistant.