Here’s how much money Google estimates Microsoft’s cloud business is actually losing
Satya Nadella, chief executive officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.
SeongJoon Cho | Bloomberg | Getty Images
Google has for years been playing catch-up in the cloud infrastructure market, where it’s seen in the industry as a distant third in the U.S., 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 some extrapolation of other market statistics, suggests Google believes it’s closer to second place than analysts think.
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Google’s document estimates that Microsoft generated under $29 billion in Azure consumption revenue in the latest fiscal year, which ended June 30, reflecting the value of cloud infrastructure services used by clients. That’s several billion dollars less than what Wall Street analysts had forecast. Bank of America was the most bullish, predicting Azure would pull in $37.5 billion in fiscal 2022. Cowen predicted revenue of $33.9 billion and UBS said $32.3 billion.
The document from Google has Azure ending the 2022 fiscal year with an operating loss of almost $3 billion, down from a loss of more than $5 billion the prior year. It claims that Azure’s sales and marketing costs approached $10 billion, accounting for 34% of consumption revenue. Microsoft said sales and marketing costs for the whole company equaled 11% of revenue over the same period.
One analyst dismissed Google’s bottom-line tally.
“There’s no way it’s that big of a loss,” said Derrick Wood, an analyst at Cowen who has the equivalent of a buy rating on Microsoft stock. His research shows Azure boasting an operating margin above 30%, compared with Google’s estimate of a -10% margin.
Cloud represents one of the most high-stakes battles in technology, as the biggest and most well-capitalized U.S. tech companies try to win lucrative deals from large enterprises and government agencies, which are increasingly pushing critical computing and storage needs out of their own data centers.
Google and Microsoft have been investing heavily to keep Amazon Web Services from dominating the market the e-commerce company pioneered in 2006. But the companies aren’t completely forthcoming about their results.
Microsoft provides year-over-year growth for Azure and other cloud services but doesn’t give a dollar figure, nor does it specify how much of the growth comes just from Azure. The Azure and other cloud services metric also includes, among other things, enterprise mobility and security, or EMS, tools that can be sold separately.
Google parent Alphabet, meanwhile, doesn’t tell investors how much revenue or operating income the Google Cloud Platform, or GCP, generates. It only discloses those figures for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, as well as GCP, a direct Azure rival.
Amazon reports both revenue and operating income for AWS, giving investors the cleanest picture of its cloud business among the three companies. AWS recorded an operating margin of 26% in the third quarter, while Google’s cloud group reported an operating margin of -10%.
Microsoft has never laid out gross profit or operating profit for the Azure division. CEO Satya Nadella said in 2019 that customer adoption of “higher-level services” beyond raw computing and storage resources can lead to “good margins long term.”
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%.
Representatives for 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 consumption revenue, or ACR, for its U.S. enterprise business in the past few years. Google said in its document that the leaked presentation allowed for a more accurate modeling of the business, and Google’s calculations suggest 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. It came up with a possible number for ACR abroad using Microsoft’s statement that around 51% of total revenue in fiscal 2022 derived from customers located in the U.S. Google then added in revenue from other customer segments, such as public sector and regulated industries, based on market data from Gartner and other sources.
To determine operating expenses, Google assumed that 65,000 people are dedicated to or work mainly on Azure, referring to 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% 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 above 80%,” Google’s document says. “For a realistic analysis of Azure’s profitability these allocations have to be removed.”
Google concluded that Microsoft’s ACR growth slowed from 61% in the 2020 fiscal year to about 50% in the 2022 fiscal year. That’s faster growth than the figure Microsoft provides for all of Azure and other cloud services, which went from 56% expansion to 45% over the same period.
Google projected that Azure’s gross profit, or the revenue left after accounting for the cost of goods sold, expanded from below 29% in fiscal 2019 to almost 63% in fiscal 2022. Microsoft CFO Amy Hood has said hardware and software efficiencies helped the company widen Azure’s gross margin.
At those levels, cloud would be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin in the 2022 fiscal year was about 68%.
None of the three U.S. market leaders announces gross margins for their cloud groups.
Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s revenue in the current 2023 fiscal year. He says Microsoft could clarify things by providing a more granular breakdown.
“To have a more specific disclosure on that would be helpful,” Wood said.
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A logo hangs on the building of the Beijing branch of Semiconductor Manufacturing International Corporation (SMIC) on December 4, 2020 in Beijing, China.
Vcg | Visual China Group | Getty Images
Shares of Semiconductor Manufacturing International Corporation, China’s largest contract chip maker, fell nearly 7% Friday after its first-quarter earnings missed estimates.
After trading on Thursday, the company reported a first-quarter revenue of $2.24 billion, up about 28% from a year earlier. Meanwhile, profit attributable to shareholders surged 162% year on year to $188 million.
However, both figures missed LSEG mean estimates of $2.34 billion in revenue and $225.1 million in net income, as well as the company’s own forecasts.
During an earnings call Friday, an SMIC representative said the earnings missed original guidance due to “production fluctuations” which sent blended average selling prices falling. This impact is expected to extend into the second quarter, they added.
For the current quarter, the chipmaker forecasted revenue to fall 4% to 6% sequentially. Gross margin is also expected to fall within the range of 18% to 20%, compared to 22.5% in the first quarter.
Still, the first quarter saw SMIC’s wafer shipments increase by 15% from the previous quarter and by about 28% year-on-year.
In the earnings call, SMIC attributed that growth to customer shipment pull in, brought by changes in geopolitics and increased demand driven by government policies such as domestic trade-in programs and consumption subsidies.
In another positive sign for the company, its first-quarter capacity utilization— the percentage of total available manufacturing capacity that is being used at any given time— reached 89.6%, up 4.1% quarter on quarter.
“SMIC’s nearly 90% utilization rate reflects strong domestic demand for semiconductors, likely driven by smartphone and consumer electronics production,” said Ray Wang, a Washington-based semiconductor and technology analyst, adding that the demand was also reflected in the company’s strong quarterly revenue growth.
Meanwhile, the company said in the earnings call that it is “currently in an important period of capacity construction, roll out, and continuously increasing market share.”
However, SMIC’s first-quarter research and development spending decreased to $148.9 million, down from $217 million in the previous quarter.
Amid increased demand, it will be crucial for SMIC to continue ramping up their capacity, Simon Chen, principal analyst of semiconductor manufacturing at Informa Tech told CNBC.
SMIC generates most of its revenue from older-generation semiconductors, often referred to as “mature-node” or “legacy” chips, which are commonly found in consumer electronics and industrial equipment.
The state-backed chipmaker is critical to Beijing’s ambitions to build a self-sufficient semiconductor supply chain, with the government pumping billions into such efforts. Over 84% of its first-quarter revenue was derived from customers in China.
“The localization transformation of the supply chain has been strengthened, and more manufacturing demand has shifted back domestically,” a representative said Friday.
However, chip analysts say the chipmaker’s ability to increase capacity in advance chips — used in applications that demand higher levels of computing performance and efficiency at higher yields — is limited.
This is due to U.S.-led export controls, which prevent it from accessing some of the world’s most advanced chip-making equipment from the Netherlands-based ASML.
Nevertheless, the chipmaker appears to be making some breakthroughs. Advanced chips manufactured by SMIC have reportedly appeared in various Huawei products, notably in the Mate 60 Pro smartphone and some AI processors.
In the earnings call, the company also said it would closely monitor the potential impacts of the U.S.-China trade war on its demand, noting a lack of visibility for the second half of the year.
Phelix Lee, an equity analyst for Morningstar focused on semiconductors, told CNBC that the impacts of U.S. tariffs on SMIC are limited due to most of its revenue coming from Chinese customers.
While U.S. customers make up about 8-15% of revenue on a quarterly basis, the chips usually remain and are consumed in Chinese products and end users, he said.
“There could be some disruption to chemical, gas, and equipment supply; but the firm is working on alternatives in China and other non-U.S. regions,” he added.
SMIC’s Hong Kong-listed shares have gained over 32.23% year-to-date.
Close-up of a hand holding a cellphone displaying the Amazon Pharmacy system, Lafayette, California, September 15, 2021.
Smith Collection | Gado | Getty Images
Amazon is expanding its online pharmacy to fill prescription pet medications, the company announced Thursday.
The company said it has added “hundreds of commonly prescribed pet medications” to its U.S. site, ranging from flea and tick solutions to treatments for chronic conditions.
Prescriptions are purchased via Amazon’s storefront and must be approved by a veterinarian. Online pet pharmacy Vetsource will oversee the dispensing and delivery of medications, said Amazon, adding that items are typically delivered within two to six days.
Amazon launched its digital drugstore in 2020 with the added perk of discounts and free delivery for Prime members. The company has been working to speed up prescription shipments over the past year, bringing same-day delivery to a handful of U.S. cities. Last October, Amazon set a goal to make speedy medicine delivery available in nearly half of the U.S. in 2025.
The new pet medication offerings puts Amazon into more direct competition with online pet pharmacy Chewy, as well as Walmart, which offers pet prescription delivery.
Amazon Pharmacy is part of the company’s growing stable of healthcare offerings, which also includes One Medical, the primary care provider it acquired for roughly $3.9 billion in July 2022. Amazon’s online pharmacy was born out of the company’s 2018 acquisition of online pharmacy PillPack.
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