Google and analysts disagree on whether Microsoft’s cloud business is making or losing money

[Epoch Times, January 02, 2023](Compiled and reported by Epoch Times reporter Zhao Ziji) Google has been striving for the upper reaches of the cloud infrastructure business for many years, and the industry believes that its business scale is second only to Amazon andMicrosofthowever, for investors, the three companies report cloud infrastructure metrics in different ways, making it difficult to compare.

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However, Google employees, according to a leakedMicrosoftdocuments and analysis of other market statistics, leading to internal estimates indicating that Google believes its company’scloud businessThe size is closer to Microsoft than analysts thought.

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Google’s filing estimates that Microsoft created just under $29 billion in Azure in its latest fiscal year ending June 30, 2022.cloud businessRevenue, which reflects the value of cloud infrastructure services used by customers. The figure was billions of dollars less than Wall Street analysts had predicted. Bank of America is the most bullish, predicting that Azure will bring in $37.5 billion in revenue in fiscal 2022. Cowen analysts had expected revenue of $33.9 billion, while UBS had forecast $32.3 billion.

Google documents show that Azure will end fiscal 2022 with an operating loss of nearly $3 billion, compared with a loss of more than $5 billion the year before. It claimed sales and marketing costs for Azure were close to $10 billion, or 34% of consumption revenue. Sales and marketing costs for the company as a whole amounted to 11 percent of revenue in the same period, Microsoft said.

Analysts refute Google’s estimates

“It’s impossible to lose that much,” said Cowen analyst Derrick Wood, who has a “buy” rating on Microsoft stock. His research shows that Azure’s operating margin is above 30%, while Google’s estimated margin is -10%.

Cloud computing represents one of the riskiest races in technology, as the largest and best-capitalized U.S. technology companies try to win lucrative business from large corporations and government agencies. Therefore, there is an increasing demand for data centers for critical computing and storage.

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Google and Microsoft have been investing heavily to prevent Amazon Web Services from dominating the market it pioneered in 2006. But these companies are not fully open about their operations.

Microsoft provided year-over-year growth for Azure and other cloud services, but did not give specific revenue figures or specify how much of the growth came from Azure. The Azure and other cloud service metrics also include enterprise mobility and security tools, or EMS, which are sold separately.

Likewise, Alphabet, Google’s parent company, doesn’t report to investors how much revenue Google Cloud Platform (GCP) brings in. It disclosed only figures for the so-called Google Cloud aggregate, which includes a subscription service for Google Workspace collaboration software.

Amazon reports AWS revenue and earnings. For investors, this is the clearest cloud business data among the three companies. AWS posted an operating gross profit of 26% in the third quarter, while Google’s cloud division reported an operating margin of -10%.

Microsoft never breaks out gross or operating profit for the Azure division.CEO of MicrosoftNadella(Satya Nadella) said in 2019 that customers adopting “higher-level services” beyond raw computing and storage resources can lead to “good long-term profits.”

According to Gartner, Amazon AWS 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 of Google and Microsoft declined to comment.

How Google Estimates Revenue and Profit

According to the Google filing, the analysis is based on a leaked Microsoft presentation cited in a Business Insider article that included consumption revenue (ACR) for Microsoft’s Azure cloud business over the past few years. In its estimates document, Google said the leaked presentation allowed for a more accurate modeling of Microsoft’s Azure business. Google’s calculations show 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. Microsoft’s statement revealed that about 51% of total revenue in fiscal year 2022 will come from US customers. Google estimates revenues from other customer segments, such as the public sector and regulated industries, based on market data from Ghana and other sources.

To determine operating expenses, Google assumed that Microsoft had 65,000 employees working on its Azure business, while citing another Business Insider report that said Microsoft’s cloud and artificial intelligence arm 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.

“The analyst’s estimate includes revenue contributions to the total from EMS and Power BI, both highly profitable SaaS businesses with estimated gross margins in excess of 80 percent,” Google’s filing says. “In order to make a realistic analysis of Azure’s profitability, these revenue gains must be deducted.”

Google concluded that Microsoft’s ACR growth slowed from 61% in fiscal 2020 to about 50% in fiscal 2022. But that’s still more optimistic than the drop in growth for Microsoft’s offering, including Azure and other cloud services, from 56% in 2020 to 45% in 2022.

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 helped the company expand Azure’s gross margins.

On these levels, cloud computing is 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 has released gross margins for their cloud businesses.

Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s current fiscal 2023 revenue. Microsoft could clarify the data by providing a finer breakdown, he said. “Disclosing more specific figures would be helpful,” Wood said. ◇

Responsible editor: Xu Xiaohui