Microsoft Azure losing money on $29 bln in revenue
Microsoft Corp. CEO Satya Nadella during the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.
SeongJoon Cho | Bloomberg | Getty Images
Google has been playing catch-up for years in the cloud infrastructure market, where it is seen in the industry as a distant third in the US, behind Amazon and Microsoft. The challenge for investors is that the three companies do not report cloud infrastructure statistics in a way that makes them easily comparable.
An internal estimate compiled by Google employees, based on a leaked Microsoft document and some extrapolation from other market statistics, suggests that Google believes it is closer to second place than analysts think.
Google’s document estimates that Microsoft generated less than $29 billion in Azure consumption revenue in the latest fiscal year, which ended June 30, reflecting the value of cloud infrastructure services used by customers. That’s several billion dollars less than Wall Street analysts had predicted. Bank of America was the most bullish, predicting that Azure would pull in $37.5 billion in fiscal 2022. Cowen forecast revenue of $33.9 billion and UBS said $32.3 billion.
The document from Google has Azure ending the 2022 fiscal year with an operating loss of nearly $3 billion, down from a loss of more than $5 billion the previous year. It claims that Azure’s sales and marketing costs approached $10 billion, accounting for 34% of consumption revenue. Microsoft said company-wide sales and marketing costs were equivalent to 11% of revenue over the same period.
One analyst dismissed Google’s results.
“There’s no way it’s that big of a loss,” said Derrick Wood, an analyst at Cowen who has the equivalent of a buy rating on Microsoft shares. His research shows that Azure boasts an operating margin above 30%, compared to Google’s estimate of a -10% margin.
Cloud represents one of the most high-stakes battles in technology, as the largest and most well-capitalized U.S. tech companies try to win lucrative deals from large enterprises and government agencies, which are increasingly pushing critical computing and storage needs out of their own data. centers.
Google and Microsoft have invested heavily to prevent Amazon Web Services from dominating the market the e-commerce company launched in 2006. But the companies aren’t entirely bullish about their results.
Microsoft provides year-over-year growth for Azure and other cloud services, but doesn’t give a dollar figure, nor does it specify how much of the growth comes from Azure alone. The Azure and other cloud services metrics also include, among other things, enterprise mobility and security, or EMS, tools that may be sold separately.
Google parent Alphabet, meanwhile, does not tell investors how much revenue or operating income the Google Cloud Platform, or GCP, generates. It only discloses those figures for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, as well as GCP, a direct Azure competitor.
Amazon reports both revenue and operating income for AWS, giving investors the cleanest picture of its cloud business among the three companies. AWS recorded an operating margin of 26% in the third quarter, while Google’s cloud group reported an operating margin of -10%.
Microsoft has never disclosed gross profit or operating profit for the Azure division. CEO Satya Nadella said in 2019 that customer adoption of “higher-level services” beyond raw compute and storage resources could lead to “good long-term margins.”
According to data from Gartner, AWS controlled 39% of the global cloud infrastructure market in 2021, followed by Microsoft at 21%, China’s Alibaba at 9.5% and Google at 7.1%.
Representatives for Google and Microsoft declined to comment for this story.
How Google came up with its estimates
According to Google’s document, the analysis follows an Insider article, which cited a leaked Microsoft presentation that included Azure consumption revenue, or ACR, for its US enterprise business in recent years. Google said in its document that the leaked presentation allows for a more accurate modeling of the business, and Google’s calculations indicate that ACR is the main source of revenue for Azure and other cloud services.
Google made a series of assumptions based on the leaked ACR information. It came up with a possible number for ACR abroad using Microsoft’s statement that about 51% of total revenue in fiscal 2022 will come from customers located in the U.S. Google then added revenue from other customer segments , such as the public sector and regulated industries, based on market data from Gartner and other sources.
To determine operating expenses, Google assumed 65,000 people are dedicated to or work primarily on Azure, citing an Insider report that said Microsoft’s Cloud and Artificial Intelligence organization has more than 60,000 employees.
If Google is right, Microsoft’s ACR will be about 40% the size of Amazon’s AWS business and 27% larger than Google’s cloud business.
“Analysts include revenue allocations from EMS and Power BI, both of which are highly profitable SaaS businesses with estimated gross margins above 80%,” Google’s document reads. “For a realistic analysis of Azure’s profitability, these allocations should be removed.”
Google concluded that Microsoft’s ACR growth has slowed from 61% in FY2020 to around 50% in FY2022. That’s faster growth than the figure Microsoft provides for all Azure and other cloud services, which went from 56% expansion to 45% over the same period.
Google projected Azure’s gross margin, or the revenue left over after accounting for cost of goods sold, to expand from below 29% in fiscal 2019 to nearly 63% in fiscal 2022. Microsoft CFO Amy Hood said hardware and software efficiencies helped the company increase Azure’s gross margin.
At those levels, cloud would be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin in the 2022 fiscal year was approximately 68%.
None of the three US market leaders announce gross margins for their cloud groups.
Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s revenue in the current 2023 fiscal year. He says Microsoft could clear things up by providing a more granular breakdown.
“Having a more specific disclosure on that would be helpful,” Wood said.
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