Microsoft chairman and CEO Satya Nadella speaks at the Microsoft Build: AI Day event on May 1, 2024 in Bangkok, Thailand.
Charinee Tiraspa | Reuters
Microsoft The company on Wednesday updated its quarterly revenue guidance for its three business segments, giving investors a better understanding of the software maker’s fast-growing cloud infrastructure business.
The company is bolstering its Productivity and Business Process segment, which includes Office productivity software subscriptions, with services it has long offered within its Intelligent Cloud unit featuring Azure.
Productivity and business processes will also have access to Windows commercial products and cloud services that are part of the More Personal Computing segment, including volume licensing of the Windows operating system and cloud-based Windows tools.
Microsoft is removing its Power BI data analytics tools and Enterprise Mobility and Security product groups from a highly-visible year-over-year growth metric called Azure and other cloud services.
With these two transitions, the new Azure numbers will “align more closely with consumption businesses,” Microsoft announced. Investor Presentation To summarize the changes: Consumption figures reflect commercial clients actively using compute and storage services in Azure.
But Microsoft is adding revenue from its search and news advertising division, which previously belonged to its “More Personal Computing” division, to Azure and other cloud services.
The company said it expects first-quarter Azure and other cloud services revenue under the new definition to be 1-2 percentage points lower than in the fourth quarter, and up 33% at constant exchange rates. In late July, under the previous Azure definition, the company had forecast growth of 28-29% at constant exchange rates.Historically, growth for Azure and other cloud services has been driven by consumption, rather than per-user tools, which have seen slower seat-count growth.
“Azure visibility has increased,” said Jason Ader, an analyst at William Blair who has a buy rating on Microsoft shares. He noted that removing the per-user component of Azure growth that Microsoft has long included in its tally has made it harder to understand consumption.
Amazon The company discloses revenue for its market-leading Amazon Web Services division, but comparisons aren’t easy because Microsoft’s Azure financial reporting methodology focuses on the per-user portion.
Additionally, Microsoft said it will allocate a portion of revenue from its 2022 acquisition of Nuance Communications under its Intelligent Cloud umbrella to its Productivity and Business Processes division. And since both are for PCs, the company will disclose combined growth rates for Windows and Devices each quarter, rather than announcing them separately.
A new metric called “Microsoft 365 Commercial” will appear within the Productivity and Business Processes segment, which includes revenue from Office commercial products and cloud services, Power BI, Enterprise Mobility and Security, and Windows commercial products and cloud services. The change is “to align with how you manage your business,” Microsoft said in the presentation.
But Ader said its heavy investments in productivity and business processes could make it hard for investors to gauge the health of its core commercial subscriptions to Office productivity software.Slowing growth is a “minor concern” among investors, Ader said.
The more personal computing division is reaping revenue from subscriptions to Copilot Pro, which brings generative artificial intelligence capabilities to Word, Excel and other consumer applications. This revenue has been visible in productivity and business processes since Copilot Pro was introduced earlier this year.
After a number of adjustments, Microsoft now expects its Productivity and Business Process division’s first-quarter revenue to range from $27.75 billion to $28.05 billion, up from the range of $20.3 billion to $20.6 billion it announced in late July.
The forecasts show Intelligent Cloud revenues falling to $23.8 billion to $24.1 billion from $28.6 billion to $28.9 billion, while More Personal Computing revenues are now in the range of $12.25 billion to $12.65 billion, down from $14.9 billion to $15.3 billion previously.
However, the company continues to expect overall revenue of approximately $64.3 billion, and expects its cost of sales, operating expenses, other income and expenses, and tax rate to remain unchanged.
clock: The shift from AI infrastructure to software is expected in the second half of 2024, according to Jefferies’ Brent Till.
