The purpose of reading the financial reports are to find revenue drivers and learn to build the business model map. We use Microsoft's 10-K report to educate key concepts in how to read and understand financial reports.
10-K is the most important financial report that public companies provide to SEC to expose the business performance details. It is the annual report. As suppliments, 10-Q report is quarterly and 8-K is major event report.
In the beginning of 10-K, you will find Microsoft's 3 disclosed business segments:
- Productivity and Business Processes, including Office 365 consumer, Office 365 commercial (including Teams, Exchange, Sharepoint, Copilot, PowerBI, etc), LinkedIn, Dynamics (including CRM, ERP, etc)
- Intelligent Cloud including Azure Server, Cloud infrastructure, etc
- More Personal Computing, including Windows license, Gaming, Devices, Search, etc
Different segments may have different business modes. For example, Office 365 is sold by Seats. Each seat can cost $xxx per year. The more seats you sell the more revenue generated. Azure is sold by consumption or usage. The more you use (space, computing) the more you pay. AI serivce is also sold by token consumption. The more tokens you consume the more you pay. Windows license or XBOX devices are sold by copies. You pay one-off to buy the license or device and no need to pay anymore.
Due to the revenue driver difference, $1 revenue from 365 is different from $1 revenue from XBOX devices. Market likes recurring revenue more than one-off revenue.
The key understanding you should aim on reading a 10-K are:
- What are the main businesses?
- Who are the customers?
- How customers pay? Subscription or one-off or consumption based?
- Is the business gaining customers or lossing customers?
- Does the company have pricing power?