Original URL: http://www.theregister.co.uk/2008/10/24/microsoft_datacenter_spending_cuts/

Microsoft 2.0 feels data center pinch

'Low-priority' spending

By Gavin Clarke

Posted in Financial News, 24th October 2008 00:21 GMT

Microsoft's burgeoning online strategy is beginning to feel the spending pinch as the company battens down against a potential recession.

The company said it's "pulling back spending in lower priority areas" including the rollout of data centers, along with reduced hiring, marketing and travel spending.

Chris Liddell, Microsoft's chief financial officer, said Thursday the goal is to reduce capital expenditures this year by $300m, "mostly in the data center side". He added: "Each division has had lower-priority spending taken out" on marketing and people related expenses like travel.

It's the first sign Microsoft is cutting costs in non-core areas and re-ordering its priorities to focus on the core.

Data centers are a key to Microsoft's online strategy, and the company has spent millions of dollars this year rolling out the centers to support its cloud-computing initiative.

All that spending, though, has meant losses and increased costs associated with any revenue that it does earn. Losses more than doubled suddenly in the summer's fourth quarter while revenue has fallen each quarter since January.

For the first fiscal quarter, announced Thursday, Microsoft's online business revenue was up 14 per cent year on year but down eight percent compared to the summer's fourth quarter. Losses were also up year on year - 81 per cent to $480m - but down fractionally against the fourth-quarter's loss of $488m.

Cost of revenue in the first quarter grew $183m or 47 per cent, "primarily driven by increased data center and equipment costs, online content expenses and agency expenses," Microsoft said.

Sales and marketing expenses increased $54 million or 23 per cent, and research and development $54 million or 19 per cent - largely due to increased "staff-related expenses".®