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Why Microsoft’s Expenses Are Rising

Ruchi Gupta - Author
By

Nov. 13 2017, Updated 10:31 a.m. ET

R&D expenses rose 15% YoY

Some of Microsoft’s (MSFT) key cost items have increased consistently in the last four quarters. In fiscal 1Q18 (September quarter), its cost of revenue rose 6.0% YoY (year-over-year), its sales and marketing expenses rose 18% YoY, and its R&D (research and development) expenses rose 15% YoY.

In fiscal 4Q17 (June quarter), its cost of revenue rose 5.0% YoY, its marketing expenses rose 6.0% YoY, and its R&D expenses rose 9.0% YoY.

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Operating expenses rose to $16.8 billion

In fiscal 1Q17, Microsoft’s cost of revenue rose 9.0% YoY, its marketing expenses rose 3.0% YoY, and its R&D expenses rose 5.0% YoY. Its marketing and R&D expenses have risen steadily since 1Q17.

The increase in its cost of revenue, marketing expenses, and R&D expenses saw Microsoft’s total operating expenses rise to $16.8 billion in 1Q18, compared to $15.2 billion in 1Q17.

LinkedIn at the center of rising costs

The increases in Microsoft’s expenses in recent quarters could be attributed to the acquisition of professional networking site LinkedIn. In recent quarters, the company has been citing LinkedIn as a primary driver of its costs tied to revenue, marketing, and R&D.

In 1Q18, LinkedIn generated $1.1 billion in revenue for Microsoft, but the business produced an operating loss of $294 million in the quarter. Among other ways, Microsoft monetizes LinkedIn through online advertising. LinkedIn’s advertising rivals Facebook (FB), Alphabet (GOOGL), Twitter (TWTR), and Yelp (YELP), which reported advertising revenues of $10.1 billion, $24.1 billion, $503 million, and $199.6 million, respectively, for their quarters that are comparable to Microsoft’s fiscal 1Q18.

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