Microsoft Corporation Executive Chairman and CEO Satya Nadella speaks during the Microsoft Build: AI Day event on May 1, 2024 in Bangkok, Thailand.
Chalinee Thirasupa | Reuters
Microsoft updated its quarterly revenue forecasts for its three business segments on Wednesday, giving investors a better insight into the software maker’s growing cloud infrastructure business.
The company is expanding its productivity and business processes division, which includes subscriptions to Office productivity software, with services that have been included in the Intelligent Cloud with Azure unit for years.
The Productivity and Business Processes business unit also receives commercial Windows products and cloud services, part of the More Personal Computing segment, which includes volume licensing for the Windows operating system and cloud-based Windows tools.
Microsoft is removing the Power BI data analytics tool and the Enterprise Mobility and Security product group from a closely watched annual growth metric called Azure and other cloud services.
With the departure of those two companies, the new Azure number is “now more aligned with the consumer business,” Microsoft said in an investor presentation summarizing the changes. Consumption reflects commercial customers who are actively using compute and storage services in Azure.
But Microsoft is investing revenue from its search and news advertising category – which was previously included under “More Personal Computing” – in Azure and other cloud services.
The company expects constant currency revenue growth of 33 percent for Azure and other cloud services in the first quarter of the fiscal year under the new definition. This is 1 to 2 percentage points less than in the fourth quarter of the fiscal year. At the end of July, the company had forecast constant currency growth of 28 to 29 percent based on the previous Azure definition. In the past, consumption was the growth driver for Azure and other cloud services, not user-related tools, where seat growth has slowed.
“We have more visibility into Azure,” said Jason Ader, a William Blair analyst who rates Microsoft shares with a buy rating. He pointed to the removal of the per-user elements of Azure growth that Microsoft has included in the count for years, making it harder to understand consumption.
Amazon reports revenue for its market-leading Amazon Web Services division, but Microsoft’s financial reporting method for Azure shows the itemized breakdown per user, meaning comparison is not easy.
Additionally, Microsoft announced that it will allocate some revenue from its 2022 acquisition of Nuance Communications, which appeared under Intelligent Cloud, to the Productivity and Business Processes division. And each quarter, the company will announce a combined growth rate for Windows and for devices, rather than communicating them separately, since both are PC-focused.
A new metric called Microsoft 365 Commercial will appear in the Productivity and Business Processes segment. 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 is intended to “align the way we do business,” Microsoft said in the presentation.
But with so much going into productivity and business processes, Ader said it could become more difficult for investors to understand the state of core commercial subscriptions to office productivity software. A slowdown in growth would be a “minor concern” for investors, Ader said.
The More Personal Computing segment generates revenue from subscriptions to Copilot Pro, which brings generative artificial intelligence to Word, Excel and other consumer applications. These revenues have been in the productivity and business process areas since the launch of Copilot Pro earlier this year.
As a result of the numerous adjustments, Microsoft now expects revenue in the productivity and business processes segment to be between $27.75 billion and $28.05 billion in the first quarter of the fiscal year. This is higher than at the end of July, when the company had forecast revenue of between $20.3 billion and $20.6 billion.
The forecast calls for Intelligent Cloud revenue of $23.80 billion to $24.10 billion, down from $28.6 billion to $28.9 billion. And it calls for More Personal Computing revenue of $12.25 billion to $12.65 billion, down from $14.9 billion to $15.3 billion previously.
However, Microsoft still expects revenue of around $64.3 billion. And it does not anticipate any changes in cost of sales, operating expenses, other income and expenses, or tax rate.
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