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Did Microsoft’s Strong Revenue Growth Results Improve Its Margins?

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Nov. 20 2020, Updated 3:35 p.m. ET

Microsoft’s margins expanded in 1Q17

Previously in this series, we discussed Microsoft’s (MSFT) fiscal 1Q17 earnings as well as the performance of its operating segments in the previous quarter. Except for MPC (More Personal Computing), all operating segments reported growth. With MPC, the decline in the segment was less than expected.

In fiscal 1Q17, Microsoft’s gross margin stood at ~61.7%, as compared to ~64.7% in fiscal 1Q16. Microsoft’s Intelligent Cloud segment contributed ~34% to the company’s total revenues, while its operating margin stood at 32% in fiscal 1Q17. The MPC and Productivity and Business Processes segments contributed 50% and 36%, respectively, to overall revenues, and these segments’ operating margins were ~21% and ~47%, respectively, during the same period. Notably, the operating margins in all segments have fallen.

Despite the lower margins associated with the cloud, as we have seen in IBM’s (IBM) recently announced fiscal 3Q16 earnings, Microsoft reported an expansion in its commercial cloud margins, which grew to 49% in 1Q17, as compared to 42% in 4Q16.

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Microsoft’s margins, cash, debt, and cash flow position

In 1Q17, Microsoft’s cash reserves stood at $136.9 billion. It generated operating cash flow worth $11.6 billion in 1Q17. Microsoft’s total debt as of 1Q17 stood at $74.69 billion. In the last couple of quarters, Microsoft’s debt has risen.

Like other technology companies, the majority of Microsoft’s cash is parked outside the United States. For this reason, technology companies often resort to bond issuances to borrow for acquisitions, dividends, and buybacks. For the same reason—despite having significant cash reserves—Microsoft resorted to debt to fund its latest and largest-ever acquisition of LinkedIn (LNKD).

Notably, despite having significant cash reserves, Apple (AAPL) raised $1 billion in Australian bonds (EWA) in June 2016.

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