Satya Nadella, Chief Executive Officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul on 15/11/2022.
SeongJoon Cho | Bloomberg | Getty Images
Google has played in the cloud infrastructure market for years, where it is considered a distant third in the US in the industry Amazon Spirit Microsoft. The challenge for investors is that the three companies don’t report cloud infrastructure metrics in a way that’s easily comparable.
However, an internal estimate by Google employees, based on a leaked Microsoft document and an extrapolation of other market statistics, suggests that Google thinks it’s closer to second place than analysts believe.
Google’s document estimates that Microsoft generated revenue from the use of Azure under $29 billion for the most recent fiscal year ended June 30, reflecting the value of the cloud infrastructure services used by customers. That’s several trillions of dollars less than Wall Street analysts had predicted. Bank of America was the most optimistic, forecasting that Azure would collect $37.5 billion in fiscal 2022. Cowen forecast revenue of $33.9 billion and UBS said $32.3 billion.
According to Google’s document, Azure ended fiscal 2022 with an operating loss of nearly $3 billion, up from a loss of more than $5 billion the previous year. Azure’s sales and marketing expenses are claimed to have totaled $10 billion, accounting for 34% of revenue from usage. According to Microsoft, sales and marketing expenses accounted for 11% of revenue for the entire company during the same period.
An analyst dismissed Google’s record.
“There’s no way it’s that big of a loss,” said Derrick Wood, an analyst at Cowen, which has the equivalent of a buy rating on Microsoft stock. His research shows that Azure has an operating margin of over 30%, compared to Google’s estimate of a -10% margin.
The cloud represents one of the highest-stakes battles in technology as the largest and best-capitalized US tech companies seek to win lucrative deals from large corporations and government agencies that are increasingly extracting critical compute and storage needs from their own data centers .
Google and Microsoft have invested heavily to keep Amazon Web Services, the e-commerce company that pioneered it in 2006, from dominating the market. But the companies don’t fully disclose their results.
Microsoft offers year-over-year growth for Azure and other cloud services, but doesn’t give a dollar number, nor does it specify how much of the growth comes from Azure alone. Metrics for Azure and other cloud services also include, but are not limited to, Enterprise Mobility and Security or EMS tools that may be sold separately.
Google parent Alphabet, meanwhile, doesn’t tell investors how much revenue or operating income Google Cloud Platform, or GCP, generates. These figures are only known for the so-called Google Cloud, which includes subscriptions for the collaboration software Google Workspace and for GCP, a direct competitor of Azure.
Amazon reports both revenue and operating income for AWS, giving investors the cleanest picture of its cloud business among the three companies. AWS reported 26% operating margin in the third quarter, while Google’s cloud group reported -10% operating margin.
Microsoft never disclosed gross profit or operating profit for the Azure division. CEO Satya Nadella said in 2019 that customer adoption of “higher value services” beyond pure compute and storage resources could lead to “good long-term margins.”
According to data from Gartner, AWS controlled 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%.
Google and Microsoft officials declined to comment on this story.
How Google came up with its estimates
According to Google’s document, the analysis follows an insider article that cited a leaked Microsoft presentation that included Azure Consumption Revenue (ACR) for US corporate business over the past few years. Google said in its document that the leaked presentation allowed for more accurate modeling of the deal, and Google’s calculations suggest that ACR is the main source of revenue for Azure and other cloud services.
Google made a number of assumptions based on the leaked ACR information. A possible number for ACR overseas was determined based on Microsoft’s statement that approximately 51% of total revenue in fiscal 2022 came from customers in the United States, based on market data from Gartner and other sources.
To determine operating costs, Google estimated that 65,000 people were dedicated to or primarily working on Azure, citing an insider report that said Microsoft’s cloud and artificial intelligence organization had over 60,000 employees.
If Google is right, Microsoft’s ACR would be about 40% larger than Amazon’s AWS business and 27% larger than Google’s cloud business.
“Analysts include revenue attributions from EMS and Power BI, both of which are highly profitable SaaS companies with estimated gross margins in excess of 80%,” Google said in the document. “For a realistic analysis of Azure profitability, these attributions need to 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 number Microsoft reports for all Azure and other cloud services, which expanded from 56% to 45% over the same period.
Google forecast that Azure’s gross profit, or revenue remaining after accounting for cost of goods sold, grew from under 29% in fiscal 2019 to nearly 63% in fiscal 2022. Microsoft CFO Amy Hood said the hardware and software efficiencies have helped the company increase Azure’s gross margin.
At those levels, the cloud would be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin for fiscal 2022 was about 68%.
None of the three US market leaders report gross margins for their cloud groups.
Cowen expects the broader set of Azure and other cloud services to account for 27% of Microsoft’s revenue in current fiscal 2023. He says Microsoft could clarify things by providing a more detailed breakdown.
“More disclosure about this would be helpful,” Wood said.
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