Satya Nadella, CEO of Microsoft Corp., at the company’s Ignite Spotlight event in Seoul on Nov. 17, 2019. 15, 2022.
Seong Joon Cho | Bloomberg | Getty Images
Google has for years caught up in the cloud infrastructure market, where it is considered in the industry a distant third in the United States, behind Amazon and 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 assembled by Google employees, based on a leaked Microsoft document and an extrapolation of other market statistics, suggests that Google thinks it is closer to second place than analysts believe.
Google’s document estimates that Microsoft generated less than $29 billion in Azure consumer revenue in the last 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 expected. Bank of America was the most optimistic, predicting that Azure would pull in $37.5 billion in fiscal 2022. Cowen forecast revenue of $33.9 billion and UBS $32.3 billion.
Google’s document says Azure ends fiscal 2022 with an operating loss of nearly $3 billion, compared to a loss of more than $5 billion the previous year. He says Azure’s sales and marketing costs approached $10 billion, which represents 34% of consumer revenue. Microsoft said sales and marketing costs for the entire company were 11% of revenue over the same period.
An analyst dismissed Google’s results tally.
“There’s no way it’s going to be such a big loss,” said Cowen analyst Derrick Wood, who has the equivalent of a buy rating on Microsoft shares. His research shows that Azure has an operating margin of over 30%, compared to an estimate of -10% by Google.
The cloud represents one of the biggest tech battles as America’s largest and best-capitalized tech companies seek lucrative contracts from big business and government agencies, which are increasingly putting off critical needs. when it comes to calculating and storing their own data. .centers.
Google and Microsoft have invested heavily to prevent Amazon Web Services from dominating the market that the e-commerce company launched in 2006. But the companies aren’t completely open about their bottom line.
Microsoft provides year-over-year growth for Azure and other cloud services, but doesn’t provide a dollar figure or say how much of the growth comes from Azure alone. Azure Metric and other cloud services also includes, among other things, enterprise mobility and security, or EMS, tools that may be sold separately.
Alphabet, Google’s parent company, doesn’t tell investors how much revenue or operating revenue the Google Cloud Platform, or GCP, generates. It only discloses these numbers for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, as well as GCP, a direct rival to Azure.
Amazon reports both revenue and operating profit from AWS, giving investors the clearest picture of its cloud business among the three companies. AWS reported an operating margin of 26% in the third quarter, while Google’s cloud group reported an operating margin of -10%.
Microsoft has never presented gross profit or operating profit for the Azure division. CEO Satya Nadella said in 2019 that customers’ adoption of “next-tier services” beyond raw computing and storage resources can lead to “good long-term margins.”
According to data from Gartner, AWS controls 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 from 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 Consumer Revenue, or ACR, for its US enterprise business during of recent years. Google said in its document that the leaked presentation allows for more accurate modeling of the business, and Google’s calculations suggest that ACR is the primary source of revenue for Azure and other cloud services.
Google made a series of assumptions based on the leaked ACR information. He offered a possible figure for overseas ACR using Microsoft’s statement that approximately 51% of total fiscal 2022 revenue came from customers located in the United States, then added to revenue from other segments. customer base, such as the public sector and regulated industries, based on Gartner Market Data and other sources.
To determine operating expenses, Google assumed that 65,000 people are dedicated or primarily working on Azure, citing an Insider report that Microsoft’s cloud and AI organization had 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 allocations from EMS and Power BI, both of which are highly profitable SaaS businesses with estimated gross margins of over 80%,” Google’s document says. “For a realistic analysis of Azure’s profitability, these allocations should be removed.”
Google concluded that Microsoft’s ACR growth fell from 61% in fiscal year 2020 to around 50% in fiscal year 2022. This is faster growth than the figure provided by Microsoft for all Azure and other cloud services, which grew from 56% expansion to 45% over the same period.
Google projected that Azure’s gross profit, or income remaining after accounting for cost of goods sold, grew from less than 29% in fiscal 2019 to nearly 63% in fiscal year 2022. Microsoft Chief Financial Officer Amy Hood said hardware and software efficiency has helped the company grow. Azure’s gross margin.
At these levels, the cloud would be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin in fiscal year 2022 was approximately 68%.
None of the three US market leaders announce gross margins for their cloud groups.
Cowen expects the broader Azure group and other cloud services to account for 27% of Microsoft’s revenue in the current fiscal year 2023. 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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