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An Upside Hidden Deep In Microsoft's Numbers

Beulah Meriam K profile picture
Beulah Meriam K


  • Microsoft's cloud computing foray has given rise to some interesting side-effects.
  • One of these is the leverage they now have because of one particular metric.
  • What is this metric, and how does it strengthen Microsoft as a cloud company?

Microsoft’s (NASDAQ:MSFT) ascent in the market capitalization charts has been swift since the time the company started concentrating on the cloud computing market. With growth rates accelerating over the last four quarters, there is a fair chance for the company to keep moving up the ladder. But there is one metric that all but the most diligent of investors will fail to see as an upside: operating margins.

A Brief Look at Segment Margins

Before we can get into the details of why Microsoft’s operating margins make a huge difference, let's take a closer look at Microsoft’s three segments: Productivity and Business Processes, Intelligent Cloud and More Personal Computing and their impact on the company’s overall performance.

During the third quarter Microsoft reported $22,090 million in revenues: $23,557 million from the three segments, with a loss of $1,467 million booked under Corporate and Other. Of that $23,557 million, More Personal Computing accounted for 37.51%, followed by Productivity and Business Processes at 33.78%, and Intelligent Cloud the remaining 28.71%.

Source:Microsoft Q3-2017 Press Release

Despite its second-placed position in terms of revenue, Productivity and Business Processes, which includes cloud software (Software as a Service, or SaaS) applications such as Office 365, Dynamics 365 and LinkedIn Sales Navigator, posted an operating income of $2,783 million, followed by Intelligent Cloud with $2,097 million and More Personal Computing segment with $2,097 million.

The two cloud-based segments have high operating margins, and accounted for 70% of combined operating income.

The Productivity and Business Processes segment has been a huge winner for Microsoft on the operational front, as margins stayed well above the 40% mark for the past several quarters before contracting to 34.97% during the third quarter. The addition of LinkedIn to the segment reduced the margins during that quarter.

Microsoft CFO Amy Hood told analysts

This article was written by

Beulah Meriam K profile picture
I do deep-dive analyses into the top companies in multiple segments, including retail, consumer goods and technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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