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Microsoft’s Q3 hit by cloud investments, income falls to $3.8bn

Competing with AWS and expanding into new regions leaves a hole in the finances

Microsoft reported net income of $3.76bn for the third quarter of 2016, down $1.2bn from the same period in 2015.

In its latest financial statement, Microsoft said Office commercial products and cloud services revenue grew by 7% in constant currency (eliminating the effects of exchange-rate fluctuations), driven by Office 365 revenue growth of 63%.

Server products and cloud services revenue increased by 5% in constant currency, driven by double-digit annuity revenue growth, while Azure revenue grew by 120% in constant currency. Usage of Azure compute and Azure SQL database more than doubled year over year, the company said.

In a transcript of the earnings call posted on the Seeking Alpha financial website, the company’s chief financial officer, Amy Hood, said margins in the company’s commercial cloud had been affected by investments in datacentre capacity and expanding cloud services to different geographies.

This resulted in the company’s operating income declining by 14%.

“In response to enterprise customer demand, and to increase our share in the cloud market, we grew operating expenses by 13% through Azure-focused investments across engineering, additional sales and marketing capacity and the acquisition of Xamarin,” Hood said.

“Our commercial cloud gross margin was 45% this quarter, declining year over year. We accelerated our datacentre and cloud services investments to meet growing global demand,” she added.

“This quarter, we invested $2.3bn in total capital expenditures, including an increase of 65% year over year, primarily for datacentres and servers,” she said.

The company recently started fleshing out its strategy to position its cloud service as a key part of the internet of things (IoT) fabric with the availability of Azure IoT Hub.

Read more about Azure

Microsoft has fleshed out its strategy to position its cloud service as a key part of the internet of things fabric with the availability of Azure IoT Hub.

Microsoft hopes hybrid cloud platform will help enterprises that want to do more in public cloud but can't because of data sovereignty concerns.

Hood said operating income in the company’s Office 365 and Dynamics businesses declined by 7%.

In the earnings call, Microsoft CEO Satya Nadella said the company was working to make Office 365 a world-class productivity and communications service.

“For the first time, we’re opening up Office 365 not just as an enterprise tool in the service, but as a developer platform,” he said.

Along with Microsoft Graph application programming interfaces (APIs) he said Microsoft had also opened up Skype to developers, “generating developer momentum. In fact, active apps calling on Microsoft Graph APIs are up month over month”, he said.

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