Microsoft Azure loses $29 billion in revenue

Google has for many years caught up with the cloud infrastructure market, where it is considered the third most distant industry in the United States, after Amazon and Microsoft. The challenge for investors is that the three companies don’t report the cloud infrastructure metrics in a way that makes them easy to compare against each other.

However, an internal estimate compiled by Google employees, based on a leaked Microsoft document and some extrapolation of other market statistics, suggests that Google believes it is close to where it is. second position than analysts think.

Google documents estimate that Microsoft generated less than $29 billion in Azure consumption revenue for the most recent fiscal year ended June 30, reflecting the value of cloud infrastructure services provided by Microsoft. customers use. That’s several billion dollars less than what Wall Street analysts had predicted. Bank of America is most optimistic, predicting Azure will pull in $37.5 billion in fiscal 2022. Cowen predicts revenue of $33.9 billion and UBS says $32.3 billion.

The document from Google has Azure ending fiscal 2022 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 expenses amounted to $10 billion, accounting for 34% of sales revenue. Microsoft speak sales and marketing expenses of the whole company equal 11% of revenue over the same period.

One analyst dismissed Google’s final results.

“There’s no way it would have been such a big loss,” said Derrick Wood, an analyst at Cowen, whose rating is equivalent to a buy rating on Microsoft stock. His research shows Azure has an operating margin of over 30%, compared to Google’s estimate of a -10% margin.

The cloud represents one of the fiercest battles in technology, as America’s largest and best-capitalized tech companies try to win lucrative contracts from large enterprises and institutions. government agencies, companies are increasingly pushing their critical computing and storage needs away from their own data center.

Google and Microsoft have invested heavily to prevent Amazon Web Services from dominating the market that the e-commerce company pioneered in 2006. But these companies do not fully publish their results.

Microsoft provides year-over-year growth for Azure and other cloud services but does not give dollar figures, nor does it specify growth coming solely from Azure. Azure Metrics and other cloud services also include, among other things, enterprise mobility and security or EMS, tools that may be sold separately.

Meanwhile, Alphabet, Google’s parent company, doesn’t tell investors how much revenue or operating income Google Cloud Platform or GCP generates. It only disclosed those metrics for what it calls Google Cloud, which includes subscriptions to the Google Workspace collaboration software, as well as GCP, a direct competitor to Azure.

Amazon reports both revenue and operating income for AWS, giving investors the clearest picture of their cloud business of the three. AWS recorded an operating margin of 26% in the third quarter, while the Google cloud team reported an operating margin of -10%.

Microsoft has never given gross or operating profit to the Azure division. CEO Satya Nadella said in 2019 that customer use of “higher-level services” beyond storage and raw computing resources could lead to “good returns in the long run”.

Based on data from GartnerAWS controls 39% of the global cloud infrastructure market in 2021, followed by Microsoft with 21%, China’s Alibaba with 9.5% and Google with 7.1%.

Representatives for Google and Microsoft declined to comment for this story.

According to Google documentation, analytics follows a Internal articles, cited a leaked Microsoft presentation covering Azure consumption revenue, or ACR, for its US enterprise business over the past few years. Google says in its document that the leaked presentation allows for more accurate business modeling, and Google’s calculations show that ACR is a major source of revenue for Azure and other cloud services.

Google made a series of assumptions based on leaked ACR information. It approximates the overseas ACR based on Microsoft’s disclosure that about 51% of its revenue came from the United States in fiscal year 2022. Google then added revenue from other customer segments, such as the public sector and regulated industries, based on the data. market from Gartner and other sources.

To determine operating costs, Google assumes that 65,000 people are dedicated or work primarily on Azure, referring to Insiders report says Microsoft’s Cloud and Artificial Intelligence organization has more than 60,000 employees.

If Google is correct, Microsoft’s ACR would be about 40% the size of Amazon’s AWS business and 27% larger than Google’s cloud business.

Analysts include revenue allocation from EMS and Power BI, both of which are highly profitable SaaS businesses with estimated gross margins above 80%, the Google document says. “For a realistic analysis of Azure profitability, these allocations must be eliminated.”

Google concluded that Microsoft’s ACR growth has slowed from 61% in fiscal 2020 to about 50% in fiscal 2022. That’s faster growth than the figure Microsoft provides for all both Azure and other cloud services, which grew from 56% expansion to 45% in the same period.

Google expects that Azure gross profit, or residual revenue after accounting for cost of goods sold, has grown from less than 29% in fiscal 2019 to nearly 63% in fiscal 2022. Microsoft chief Amy Hood says the hardware and software performance has helped the company expand Azure’s Gross Margin.

At those levels, the cloud will be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin for fiscal year 2022 is around 68%.

None of the three US market leaders publish gross margins for their cloud teams.

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 said that Microsoft could clarify things by providing more detailed analysis.

“Being more specific about that would be helpful,” Wood said.

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