Microsoft's Cloud Computing Push Threatens Profit Margins

As Microsoft Corp continues to push into the cloud computing market, the company's profit margins are expected to take a hit. The shift to cloud-based services, which let corporate customers pay a subscription to access software stored and run on Microsoft's servers, will increase costs for the company. Analysts predict that Microsoft's gross margins will narrow to 76% in fiscal 2012, down from 78.4% in fiscal 2011. The company's move to the cloud has also raised concerns among investors, with some questioning whether Microsoft can maintain its profit growth.

Key Takeaways:

• Microsoft's cloud software will increase costs for the company, as it needs to invest in data centers to store and operate software for clients.
• Gross margins are expected to narrow to 76% in fiscal 2012, down from 78.4% in fiscal 2011, according to the average estimate of analysts compiled by Bloomberg.
• The company's profit margins have already shrunk to a 22-year low in 2011, and are set to fall further.
• The pressure on Microsoft's margins stems from investments in new businesses, such as adding content for Xbox and acquiring Skype Technologies SA for $8.5 billion.
• Analysts predict that cloud-related costs will range from 15% to 25% of revenue, which is about 10% more than selling standard packaged software.
• Microsoft may miss profit estimates for fiscal 2012, according to Heather Bellini, an analyst at Goldman Sachs Group Inc.
• The company's profit growth is threatened by the European debt crisis, a sluggish economic recovery, and a flooded PC industry.
• Microsoft's product cycles point to a year of slower growth in its flagship Windows and Office software businesses.

Statistics:

• Gross margins: 76% (fiscal 2012 estimate), down from 78.4% (fiscal 2011)
• Cloud-related costs as a percentage of revenue: 15% to 25%
• Microsoft's operating expenses for fiscal 2012: up to $29.2 billion, from a previous forecast of $28.6 billion
• Revenue growth: slower than 2011, according to Gartner Inc.
• Microsoft's PC industry production costs: slashed by flooding in Thailand
• Xbox game console manufacturing costs: more expensive than software

Sources:

• Heather Bellini, analyst at Goldman Sachs Group Inc.
• Jason Maynard, analyst at Wells Fargo (WFC) Securities
• Mark Moerdler, analyst at Sanford C Bernstein & Co
• Walter Price, portfolio manager at RCM Capital Management
• Gartner Inc.
• Rick Sherlund, analyst at Nomura Holdings Inc.
• Microsoft Corp
• Bloomberg
• I Media LLC 2011 Provided by Syndigate.info an Albawaba.com company