Satya Nadella, CEO of Microsoft Corp. , during the company’s Ignite Spotlight event in Seoul on November 15, 2022.
Seung Joon Cho | bloomberg | Getty Images
The Google It has for years been playing catch-up in the cloud infrastructure market, with the industry seen as a distant third in the US, after Amazon And the Microsoft. The challenge for investors is that the three companies don’t report cloud infrastructure metrics in a way that makes them easily comparable.
However, an internal estimate compiled by Google employees, based on a leaked Microsoft document and some extrapolation of other market stats, suggests that Google thinks it’s closer to second place than analysts think.
The Google document estimates that Microsoft generated less than $29 billion in Azure consumption revenue in its most recent fiscal year, which ended on June 30, reflecting the value of cloud infrastructure services customers use. That’s several billion dollars less than Wall Street analysts expected. Bank of America was the most optimistic, forecasting Azure to attract $37.5 billion in fiscal 2022. Cowen forecast revenue of $33.9 billion, and UBS said $32.3 billion.
The document from Google had Azure ending fiscal year 2022 with an operating loss of nearly $3 billion, down from a loss of more than $5 billion a year earlier. It claims that Azure sales and marketing costs are close to $10 billion, which is 34% of consumer revenue. Microsoft He said Sales and marketing costs for the entire company accounted for 11% of revenue over the same period.
One analyst dismissed Google’s final tally.
“There’s no way you could lose that much,” said Derek Wood, an analyst at Cowen who has a buy rating on Microsoft stock. Its research shows that Azure boasts an operating margin of more than 30%, compared to Google’s estimate of a margin of -10%.
The cloud represents one of the most high-stakes battles in technology, as America’s largest and most profitable technology companies try to win lucrative deals from large corporations and government agencies, which are increasingly pushing critical computing and storage needs out of their own data centers.
Both Google and Microsoft have invested heavily to keep Amazon Web Services from dominating the market that the e-commerce company pioneered in 2006. But the companies haven’t fully announced their results.
Microsoft provides year-over-year growth for Azure and other cloud services but doesn’t provide a dollar number, nor does it say how much growth is coming from just Azure. Azure Scale and other cloud services include, among other things, Enterprise Mobility and Security Tools, or EMS, which are tools that can 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 reveals these numbers for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, as well as GCP, which is a direct competitor to Azure.
Amazon reports alike Revenue and operating revenue for AWS, giving investors the cleanest picture of its cloud business out of the three. AWS posted an operating margin of 26% in the third quarter, while Google Cloud Group reported an operating margin of -10%.
Microsoft has never specified gross profit or operating profit for the Azure division. Executive Director Satya Nadella He said in 2019 that customer adoption of “high-level services” beyond raw computing and storage resources could lead to “good margins in the long run”.
to me Data from GartnerAWS controlled 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 the Google doc, parsing follows Insider article, which cited a leaked offer from Microsoft that included Azure consumption revenue, or ACR, for the US corporate business in the past few years. Google said in its document that the leaked presentation allowed for more accurate business modeling, and Google accounts 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. He came up with a potential ACR number overseas with Microsoft statment That about 51% of all revenue in fiscal 2022 was derived from customers located in the United States, 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 has assumed that 65,000 people are primarily dedicated or working on Azure, referring to an insider. Transfer He said that the Microsoft Cloud and AI organization has more than 60,000 employees.
If Google is right, then Microsoft’s ACR would be about 40% larger than Amazon’s AWS business and 27% larger than Google’s cloud business.
“Analysts include revenue allocations from EMS and Power BI, both highly profitable SaaS businesses with estimated gross margins in excess of 80%,” the Google document says. “For a realistic analysis of Azure profitability, these allocations must be removed.”
Google concluded that Microsoft’s ACR growth slowed from 61% in fiscal 2020 to about 50% in fiscal 2022. That’s faster growth than the figure Microsoft provides for all Azure and other cloud services, which rose from 56% to 45% over same period.
Google projected that Azure gross profit, or revenue left after cost of goods sold, would expand from less than 29% in fiscal 2019 to nearly 63% in fiscal 2022. Microsoft CFO Amy Hood said hardware and software efficiencies helped The company is expanding Azure gross margin.
At these levels, the cloud will be less profitable than Microsoft Windows and Office software franchises. Microsoft’s total gross margin in fiscal 2022 was approximately 68%.
None of the three US market leaders have announced gross profit margins for their cloud clusters.
Quinn expects the broader Azure suite and suite of other cloud services to account for 27% of Microsoft’s revenue in the current fiscal year 2023. He says Microsoft can clear things up by providing more granular details.
“Having more specific disclosure on that would be helpful,” Wood said.
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