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Microsoft Cloud Gross Margins Climb Amid CapEx Balancing Act

Microsoft CFO Amy Hood

Amid Microsoft’s growing cloud services revenues, the company also is lifting its cloud gross margins — a clear sign that the company is effectively balancing CapEx expenses with recurring revenue growth.

For Microsoft’s Q3 2018 results, announced yesterday, the company said:

  • Commercial cloud revenue was $6 billion, up 58 percent from the corresponding quarter last year.
  • Commercial cloud gross margin was 57 percent, up a healthy 6 points, with improvement in each cloud service, most notably Azure.
  • The company expects commercial cloud gross margin to be roughly flat to Q3, representing another quarter of material year-over-year improvement even with increasing Azure revenue mix, CFO Amy Hood said.

Hood also cautioned investors about the gross margin improvements. As more revenues shift to IaaS and PaaS services within Azure, the company will face some gross margin pressure in the cloud segment through 2019 — though there will be significant dollar growth, she added.

Microsoft Overall Revenues, Cloud Competition

Overall, Microsoft delivered a strong quarter. Revenues were $26.82 billion, up 15.6 percent, and earnings easily beat Wall Street’s expectations.

Still, competition remains intense — particularly in the cloud market. Amazon Web Services revenues were $5.442 billion in Q1 2018, up a stunning 48.6 percent from $3.661 billion in the corresponding quarter last year, according to results shared yesterday. Also, Google Cloud Platform revenues are growing — though the company didn’t share exact figures during an earnings call earlier this week.

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