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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Thiago Prudêncio | Sopa Images | Lightrocket | Getty Images
Roblox on Friday announced new short-video and AI features that come amid increasing lawmaker scrutiny into how the company protects children on its platform.
With Roblox Moments, users 13 and older will be able to create and share video clips of their gameplay with others on a feed within the platform. The artificial intelligence additions, meanwhile, will allow users to generate advanced 3D objects for the games they create on the platform.
Tune in at 4:15 p.m. ET: Roblox CEO Dave Baszucki joins CNBC TV to discuss the company’s latest announcements coming out of its developer conference. Watch in real time on CNBC+ or the CNBC Pro stream.
Although users can share video clips from mature games on Moments, users who do not meet the age requirements of those experiences will be unable to view them, the company said. Roblox will moderate each video shared on Moments and will allow users to “flag content that they find is inappropriate,” said Matt Kaufman, Roblox safety chief. Moments is launching in a limited release on Friday.
The AI features will roll out to users before the end of the year. Roblox users will be able to use the artificial intelligence tools to create objects, like futuristic monster trucks, that match the aesthetics of the games users build on the platform, said Anupam Singh, Roblox’s senior vice president of engineering. Those creations will also be moderated, Kaufman said.
Roblox faces a number of lawsuits alleging that its design enables online predators to exploit underage victims.
Louisiana Attorney General Liz Murrill sued Roblox in August, alleging the company fails to implement robust safety protocols to “protect child users from predators.” At the time, Roblox said, “any assertion that Roblox would intentionally put our users at risk of exploitation is simply untrue.”
The company on Wednesday announced it would expand an age estimation program that Roblox debuted in July.
Hock Tan, CEO of Broadcom.
Martin H. Simon | Bloomberg | Getty Images
Broadcom shares soared 15% on Friday after the chipmaker said on its earnings call that it had secured a new $10 billion customer. Analysts quickly pointed to OpenAI.
Following a better-than-expected earnings report late Thursday, Broadcom CEO Hock Tan told analysts that a fourth large customer had put in orders for $10 billion in custom artificial intelligence chips, which the company calls XPUs.
“One of these prospects released production orders to Broadcom, and we have accordingly characterized them as a qualified customer for XPUs,” Tan said. He added that the order increased Broadcom’s forecast for AI revenue next year, when shipments will begin.
Analysts at Mizuho, Cantor Fitzgerald and KeyBanc all said they think AI startup OpenAI is the customer. The Financial Times reported on Thursday, citing people familiar with the partnership, that the two companies co-designed a chip that will hit the market next year.
OpenAI declined to comment on the report.
While Broadcom doesn’t name its large web-scale customers, analysts have said dating back to last year that its first three clients were Google, Meta and TikTok parent ByteDance.
“During the call, the company surprised us by noting that it had secured a $10B order from a fourth XPU customer (we believe this is OpenAI), adding significant upside to the company’s three current XPU customers (Google, Meta, and ByteDance),” analysts at Cantor wrote in a note late Thursday. “Shipments are expected to commence in 2026.”
Broadcom’s stock has been on a tear of late as the company has joined Nvidia at the front of the race to build the kinds of processors and infrastructures needed for massive AI workloads. The stock is up about 130% in the past year, lifting Broadcom’s market cap past $1.6 trillion.
For the fiscal third quarter, Broadcom reported earnings and revenue that topped estimates. The company said it expects $17.4 billion in fourth-quarter revenue, higher than the $17.02 billion expected by Wall Street analysts, with AI revenue reaching $6.2 billion.
But news of an incoming $10 billion customer is what got Wall Street excited.
Tan said on the call that “immediate and fairly substantial demand” boosts the outlook for next year, “and really changes our thinking of what 2026 would be starting to look like.”
The company didn’t provide specific guidance for next year, but Tan suggested that growth in its AI could be above the 50% to 60% range he’d offered in the prior call.
Analysts at Mizuho raised their AI revenue growth estimate for next year to 76% up from about 60%, which would bring the total to $35 billion. Total revenue for the year ending in October 2026 is expected to increase about 30% to $81.8 billion from $63.1 billion this fiscal year, according to analysts surveyed by LSEG.
In addition to hardware, Broadcom has a large software business, keyed by its $61 billion acquisition of server virtualization software vendor VMware in 2023. Revenue in the infrastructure software business, which includes VMWare, rose 43% to $6.79 billion.
— CNBC’s Kif Leswing contributed to this report.
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