It’s been trying to catch up with the growing cloud infrastructure industry, which is viewed by the cloud infrastructure market as a third-placed player in the U.S., behind Amazon
And Microsoft.
The problem for investors is three companies need to disclose data on cloud infrastructure in a manner that allows them to be very comparable.
However, an internal calculation created by Google employees from an unpublished Microsoft document and an extrapolation of market data suggests Google believes it’s in second than analysts think.
Google’s document suggests that Microsoft produced less than $30 billion of Azure consumption revenues in the most recent fiscal year that ended on June 30 and reflects the value of cloud-based infrastructure services utilized by customers. This is a few billion dollars less than Wall Street analysts had forecast. Bank of America was the most optimistic, saying Azure would earn $37.5 billion by 2022’s fiscal year. Cowen estimated the revenue would be $33.9 billion, and UBS stated $32.3 billion.
The report by Google includes Azure concluding the 2022 financial year with a loss of nearly $3 billion, a decrease from an operating loss of more than $5 billion in the previous year. It states that Azure’s marketing and sales costs amounted to $10 billion, 34% of revenue from consumption. Microsoft claimed that marketing and sales costs across the entire business accounted for 11% of revenues over the same period.
One analyst questioned Google’s bottom line.
“There’s no way it’s that big of a loss,” said Derrick Wood, an analyst at Cowen who holds an equivalent of a buy rating on Microsoft stock. His research has revealed Azure with an operating margin higher than 30%, which is higher than Google’s estimate of a 10% margin.
Cloud is one of the most intense technological battles as the largest and most capital-backed U.S. tech firms try to secure lucrative contracts from large government agencies and large companies, who are increasingly making it difficult for them to move crucial computing and storage requirements from their data centres.
Google and Microsoft have made significant investments to stop Amazon Web Services from dominating the market that the e-commerce firm created in 2006. But they need to be more open about their findings.
Microsoft offers year-over-year growth rates of 5% for Azure along with another cloud service, but it doesn’t provide a dollar value or even define how much growth is due to Azure. It is Azure or other cloud services metric that includes the enterprise’s mobility and security or EMS tools, which can be sold as a separate product.
Google parent Alphabet cannot reveal to investors the amount of operating income or revenue Google Cloud Platform, also known as GCP, produces. The company only provides those data for its Google Cloud, which includes subscriptions to Google Workspace Collaboration software and GCP, which is an exact Azure competitor.
Amazon publishes revenue and operating earnings for AWS providing investors with the most transparent view of its cloud business from all three firms. AWS reported an operating margin of 26% during the third quarter of 2013, while Google’s cloud division had an operating margin of -5 per cent.
Microsoft has never announced operating or gross profits for its Azure division. Chief Executive Satya Nadella said in 2019 that the adoption by customers for “higher-level services” beyond raw storage and computing capabilities could be the cause of “good margins long term.”
According to Gartner’s research, AWS controlled 39% of the global market for cloud infrastructure in 2021. AWS was followed by Microsoft at 21 per cent, China’s Alibaba at 9.5 per cent, and Google at 7.1 per cent.
Reps from Google and Microsoft have declined to comment on this story.
How Google came to its estimates
According to the Google document, the study is based on an Insider article that cited the leaked Microsoft presentation that contained Azure consumption revenue, also known as ACR, to support the company’s U.S. enterprise business in the last few years. Google declared in its report that the leaked presentation helped in a more precise model of the company, and Google’s analysis suggests it is likely that ACR is the primary reason for the revenue generated by Azure and other cloud-based services.
Google has made a variety of hypotheses based on a leak of ACR information. Google was able to come up with an estimate of ACR overseas based on Microsoft’s claim that approximately 51% of revenue for fiscal 2022 was from customers based within the U.S. Google then added the payment of other customer segments, like the public sectors and industries that are regulated, according to market information that came from Gartner as well as other data sources.
To determine operating expenses, Google assumed that 65,000 individuals are devoted to or working primarily on Azure, according to an Insider report that claimed the Microsoft Cloud, as well as Artificial Intelligence organization, had over 60,000.
If Google is correct, Microsoft’s ACR could be 40% of Amazon’s AWS business and 27% bigger than Google’s own cloud-based business.
“Analysts include revenue allocations from EMS and Power BI, both highly profitable SaaS businesses with estimated gross margins above 80%,” Google’s official document states. “For a realistic analysis of Azure’s profitability, these allocations must be removed.”
Google found that Microsoft’s ACR growth has slowed from 61 per cent in the fiscal year to 50% by the fiscal year 2022. It’s a faster rate than the rate Microsoft offers for the entirety of Azure and other cloud-based services, ranging from 56% to 45% simultaneously.
Google predicted Azure’s gross profit (or the remaining revenue after accounting for the costs of selling goods, to grow from less than 29% in fiscal 2019 to nearly 63% by the fiscal year 2022. Microsoft Finance chief Amy Hood has said hardware and software efficiency have helped the company increase the gross margin of Azure.
At this level, the cloud is more profitable for Microsoft than its Windows and Office Software franchises. Microsoft’s gross margin total in the fiscal year 2022 was 68%.
The three U.S. market leaders announce gross margins for their cloud-based companies.
Cowen believes that the larger Azure and other cloud-based services make up 27 per cent of the company’s revenues in the current financial year. Cowen believes Microsoft could help clarify things by providing a more detailed breakdown.
