NASDAQ:MSFT   Microsoft Corp.
Microsoft released its fourth-quarter results on July 27. The company's revenue rose 21% year over year to $46.2 billion, beating forecasts by $1.9 billion, and earnings rose 49% to $2.17 per share, beating expectations by $0.25. Commercial cloud revenue - which comes primarily from Microsoft 365 (formerly Office 365), LinkedIn, Dynamics CRM , and the Azure cloud infrastructure platform - rose 36% from a year ago to $19.5 billion.

That represents an acceleration from the 33% growth in the commercial cloud segment in Q3, but Azure's 45% year-over-year revenue growth in constant currency slowed down from the 46% growth in the third quarter. However, Azure revenue still grew 51% in the period, compared to 50% growth in the previous quarter, so it profited from favorable currency factors.

Azure's growth rate still looks strong, but Microsoft's unwillingness to disclose any further numbers on the cloud platform is discouraging. Let's look at three reasons why Microsoft should finally open the curtain.

First, it is one of Microsoft's most significant businesses.

Azure is the main growth engine of the commercial cloud division. It has consistently grown faster than Microsoft /Office 365 and Dynamics 365 and remains the second-largest cloud infrastructure platform in the world after Amazon Web Services ( AWS ).

According to Canalys, Azure controlled 22 percent of the global cloud infrastructure market in the second quarter of 2021. It is behind AWS at 31%, but well ahead of Alphabet's Google Cloud, which is in third place with an 8% share.

Disclosing the exact amount of Azure's revenues and profits would let investors know whether Microsoft has pricing power in this competitive market, or whether it is simply trading margins for market share.

Second, consider that Amazon and Google don't hide their cloud metrics.

In 2015, Amazon began reporting accurate data on AWS revenue and operating profits. Google followed suit, reporting accurate Google Cloud revenues in 2019 and then disclosing the division's operating losses in 2020.

Last year, Amazon's AWS revenue grew 30% to $45.4 billion, or 12% of total revenue. Segment operating income rose 47% to $13.5 billion and accounted for 59% of operating income. In other words, Amazon can support the development of its low-margin retail business at the expense of its higher-margin cloud business, giving it an advantage over other online and offline retailers.

Revenues at Alphabet's Google Cloud unit rose 46% to $13.1 billion in 2020, a 7% increase. The division's operating loss increased from $4.6 billion to $5.6 billion, but Alphabet's total operating income still rose 20% to $41.2 billion. These numbers suggest that Google Cloud is offering lower prices than AWS to expand its market share, but the company can afford to stick with this losing strategy since it can compensate its losses from cloud computing with higher advertising revenue.

As for Azure, investors still don't know how much the cloud platform boosts Microsoft's revenues and how much it reduces profit growth.

Finally, no more vague hints about Azure's margins.

Microsoft executives mention Azure dozens of times during every conference call, but only hint a few times at the platform's actual gross margin. During Microsoft's third-quarter conference call in April, CFO Amy Hood said Azure's gross margin is growing, but the "shift in sales mix toward Azure" is still reducing the overall gross margin of the commercial cloud segment.

In the fourth quarter, Microsoft said that commercial cloud gross margins "increased 4 points to 70% despite the shift in revenue mix toward Azure," and the 14% year-over-year increase in operating expenses was mostly "driven by investments in Azure" - but we don't know exactly how much was spent.

These indefinite comments tell us three things about Azure: it makes far less profit than Microsoft's other commercial cloud businesses, it offers customers lower rates to keep up with AWS and Google Cloud, and it is constantly expanding with new investments and services.

Giving accurate revenue and operating profit data would clarify things and show investors how much money Microsoft is losing (or perhaps making) on one of its fastest-growing businesses.

Former Microsoft CEO Steve Ballmer recommended the management to reveal cloud revenue, margins, and profits six years ago, but his successor, Satya Nadella, did not follow the advice. Nadella's position made sense then, as Microsoft was just beginning its transition, but today it doesn't make much sense-particularly after Amazon and Google have laid all their cards on the table.



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