Microsoft CEO Satya Nadella. Photo by Bloomberg.
Enterprise Microsoft

Microsoft’s Silver Lining Is Shrinking

By  |  April 21, 2016 4:39 PM PDT
Photo: Microsoft CEO Satya Nadella. Photo by Bloomberg.

Microsoft’s earnings were bad. Revenue and profits missed analysts’ expectations. But beneath the surface, it’s even worse than it looks. A key profitability metric in Microsoft’s fight against Amazon Web Services hit the lowest point since it’s been measurable, suggesting that Microsoft’s transition to a recurring-revenue business model for cloud services could get worse before it gets better.

Microsoft’s operating profit margin for the part of its business that contains its cloud computing service Azure declined to 35.8%, from 42.9% a year earlier and 40.9% last quarter. Microsoft’s figure is still well above AWS’ nearest comparable figure of 23.6% operating profit margin for the most recent full year, but Microsoft’s number still includes a lot of older, non-cloud technology that had much more lucrative margins. As the newer, less-profitable services become a bigger portion of its Azure group, it’s likely to end up with margins a lot closer to AWS—and a lot lower than what Microsoft’s investors have been used to for the past few decades.

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