Microsoft Azure hits $29 billion loss

Google It has been playing catch-up in the cloud infrastructure market for many years, and the industry believes that it is a distant third in the United States, second only to amazon with MicrosoftThe challenge for investors is that these three companies do not report cloud infrastructure metrics in an easily comparable manner.

However, internal estimates by Google employees based on a leaked Microsoft document and some extrapolation of other market statistics suggest that Google thinks it’s closer to No. 2 than analysts think.

Google’s filing estimates that Microsoft generated just under $29 billion in Azure consumption revenue in its latest fiscal year ended June 30, reflecting the value of cloud infrastructure services customers use. That was billions of dollars less than Wall Street analysts had predicted. Bank of America is the most optimistic, predicting that Azure will generate $37.5 billion in revenue in fiscal 2022. Cowen expected revenue of $33.9 billion and UBS said it was $32.3 billion.

Google filings show Azure ended fiscal 2022 with an operating loss of nearly $3 billion, down from a loss of more than $5 billion the previous year. It claims sales and marketing costs for Azure are close to $10 billion, or 34% of consumption revenue. Sales and marketing costs across the company amounted to 11 percent of revenue during the same period, Microsoft said.

One analyst dismissed Google’s bottom-line stats.

“There’s no way a loss of that magnitude would be possible,” said Cowen analyst Derek Wood, who has an equivalent buy rating on Microsoft stock. His research shows that Azure has an operating margin of over 30%, compared with Google’s estimated margin of -10%.

The cloud represents one of the most important battles in technology, as the largest and best-capitalized U.S. tech companies try to win lucrative deals from large corporations and government agencies, which are increasingly shifting critical computing and storage needs to Squeeze out the center from their own data.

Google and Microsoft have been investing heavily to prevent Amazon Web Services from dominating the market the e-commerce company pioneered in 2006. But the companies don’t fully disclose their results.

Microsoft provided year-over-year growth for Azure and other cloud services, but didn’t give a dollar figure or specify how much of that growth came from Azure. Azure and other cloud services metrics also include Enterprise Mobility and Security or EMS tools, which are sold separately.

Meanwhile, Google parent Alphabet has not told investors how much revenue or operating income Google Cloud Platform (GCP) is generating. It disclosed only figures for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, and Azure’s direct competitor, GCP.

Amazon reported AWS revenue and operating income, giving investors the clearest look at its cloud business of the three. AWS posted an operating margin of 26% in the third quarter, while Google’s cloud unit reported a -10% operating margin.

Microsoft never breaks out gross or operating profit for its Azure division. CEO Satya Nadella said in 2019 that customers adopting “higher levels of service” beyond raw compute and storage resources can lead to “good long-term margins.”

According to Gartner, AWS controls a 39% share 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 documents, the analysis followed an Insider article that referenced a leaked Microsoft presentation that included Azure Consumption Revenue (ACR) for its US enterprise business over the past few years. Google said in its filing that the leaked presentation allowed for more accurate modeling of the business, and that Google’s calculations indicated that ACR was a major revenue generator for Azure and other cloud services.

Google made a series of assumptions based on the leaked ACR information. According to Microsoft’s disclosed fiscal year 2022, about 51% of its revenue comes from the United States, which is similar to ACR abroad. Google then added revenue from other client areas, such as the public sector and regulated industries, based on market data from Gartner and others. source.

To determine operating expenses, Google assumed that 65,000 people were dedicated or primarily working on Azure, and referenced an Insider report that said Microsoft’s cloud computing and artificial intelligence organization had more than 60,000 employees.

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

“Analysts factor in revenue allocations for EMS and Power BI, both high-margin SaaS businesses with estimated gross margins in excess of 80 percent,” Google’s filing said. “For a realistic analysis of Azure’s profitability, these allocations must be removed.”

Google concluded that Microsoft’s ACR growth slowed from 61% in FY2020 to about 50% in FY2022. That’s faster than Microsoft’s figure for all Azure and other cloud services, which rose from 56 percent to 45 percent over the same period.

Google expects Azure’s gross profit, or the revenue remaining after deducting the cost of goods sold, to expand from less than 29% in fiscal 2019 to nearly 63% in fiscal 2022. Microsoft Chief Financial Officer Amy Hood said hardware and software efficiencies have helped the company expand Azure’s gross margins.

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

None of the three major U.S. market leaders disclose gross margins for their cloud groups.

Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s current fiscal 2023 revenue. Microsoft could clarify things by providing a more granular breakdown, he said.

“More specific disclosure on this would be helpful,” Wood said.

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