Microsoft Corporation Executive Chairman and CEO Satya Nadella speaks during the ‘Microsoft Build: AI Day’ event in Bangkok, Thailand, May 1, 2024.
Chalinee Thirasupa | Reuters
Microsoft On Wednesday it updated its quarterly revenue guidance for its three business segments, in a change that will give investors better visibility into the software maker’s growing cloud infrastructure business.
The company is beefing up its Productivity and Business Processes division that includes Office productivity software subscriptions with services that have been featured for years in its Azure-powered Intelligent Cloud unit.
Productivity and Business Processes will also acquire commercial Windows cloud products and services, part of the More Personal Computing division that includes volume licensing for the Windows operating system and cloud-based Windows tools.
Microsoft is removing its Power BI data analytics tool and Enterprise Mobility and Security product group from a closely watched year-over-year growth metric called Azure and other cloud services.
With those two gone, the new Azure figure is “now more closely aligned with consumer operations,” Microsoft said in a investor presentation summarizing the changes. Consumption reflects commercial customers actively using Azure compute and storage services.
However, Microsoft is adding revenue from its search and news advertising category — which until now was in More Personal Computing — to Azure and other cloud services.
The company said it expects constant currency revenue growth of 33% for Azure and other cloud services under the new definition for the fiscal first quarter, down 1 to 2 percentage points from the fiscal fourth quarter. At the end of July, based on Azure’s previous definition, the company had called for growth of 28% to 29% in constant currency. Historically, consumption has driven growth in Azure and other cloud services, rather than per-user tools, where seat growth has slowed.
“We have more visibility on Azure,” said Jason Ader, an analyst at William Blair with a buy-equivalent rating on Microsoft shares. He cited the removal of per-user Azure deployment data that Microsoft has included in the report for years, making it more difficult to understand consumption.
Amazon discloses revenue for its market-leading Amazon Web Services division, but Microsoft’s financial reporting method for Azure has broken down the pieces by user, meaning making comparisons isn’t straightforward.
In addition, Microsoft said it will provide productivity and business processes with some revenue from its 2022 acquisition of Nuance Communications that appeared in Intelligent Cloud. And each quarter the company will reveal a combined growth rate for Windows and devices, rather than sharing them separately, since both are PC-oriented.
A new metric called Microsoft 365 Commercial will appear in the Productivity and Business Processes section. It will include revenue from commercial Office products and cloud services, Power BI, Enterprise Mobility and Security, and commercial Windows products and cloud services. The change comes “to align the way we manage the business,” Microsoft said in the presentation.
But with so much going on in productivity and business processes, Ader said the company may find it difficult for investors to understand the health of its core commercial subscriptions for Office productivity software. Slowing growth is a “minor concern” among investors, Ader said.
The More Personal Computing segment raises revenue from subscriptions to Copilot Pro, which brings artificial intelligence capabilities to Word, Excel and other consumer applications. This revenue has been seen in Productivity and Business Processes since the introduction of Copilot Pro earlier this year.
As a result of the many adjustments, Microsoft now sees $27.75 billion to $28.05 billion in fiscal first-quarter revenue from the productivity and business processes segment, down from the $20.3 billion to $20.6 billion range it provided at the end of July.
The forecast calls for Intelligent Cloud revenue between $23.80 billion and $24.10 billion, up from $28.6 billion to $28.9 billion. And it shows more PC revenue in the range of $12.25 billion to $12.65 billion, compared with $14.9 billion to $15.3 billion previously.
However, Microsoft continues to expect about $64.3 billion in total revenue. And it does not anticipate changes in cost of revenue, operating expenses, other income and expenses or tax rate.
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