Microsoft changes reporting to boost cloud consumption visibility

Microsoft on Wednesday updated quarterly revenue guidance for its three business segments in a shift that stands to give investors better visibility into the software maker’s growing cloud infrastructure business.

The company is bulking up the Productivity and Business Processes segment that includes Office productivity software subscriptions with services that have for years appeared inside the Intelligent Cloud unit that features Azure.

Productivity and Business Processes will also gain Windows commercial products and cloud services, a part of the More Personal Computing segment that includes volume licensing of the Windows operating system and cloud-based Windows tools.

Microsoft is removing the Power BI data analytics tool and the Enterprise Mobility and Security group of products from a closely watched year-over-year growth metric called Azure and other cloud services.

With those two moving out, the new Azure number “now more closely aligns to consumption business,” Microsoft said in an investor presentation summarizing the changes. Consumption reflects commercial clients actively using computing and storage services in Azure.

But Microsoft is adding revenue from its search and news advertising category — which until now was under More Personal Computing — into Azure and other cloud services.

The company said it expects 33% constant-currency revenue growth 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. In late July, based on the prior Azure definition, the company had called for growth of 28% to 29% at constant currency. Historically, consumption has driven growth in Azure and other cloud services, rather than the per-user tools, where growth in the number of seats has slowed.

“We got more visibility on Azure,” said Jason Ader, an William Blair analyst with the equivalent of a buy rating on Microsoft shares. He cited the removal of the per-user elements of Azure growth that Microsoft has included in the tally 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 featured the per-user pieces, meaning that making comparisons is not straightforward.

Additionally, Microsoft said it will give Productivity and Business Processes some revenue stemming from its 2022 Nuance Communications acquisition that has appeared under Intelligent Cloud. And every quarter the company will disclose a combined growth rate for Windows and for devices, instead of communicating them separately, given that these are both PC-oriented.

A new metric called Microsoft 365 Commercial will appear inside the Productivity and Business Processes segment. It will include revenue from Office commercial products and cloud services, Power BI, Enterprise Mobility and Security and Windows commercial products and cloud services. The change comes “to align how the business is managed,” Microsoft said in the presentation.

But with so much going into Productivity and Business Processes, Ader said the company might be making it more difficult for investors to understand the health of core commercial subscriptions for Office productivity software. A slowdown in growth is a “minor concern” among investors, Ader said.

The More Personal Computing segment is picking up revenue from subscriptions to Copilot Pro, which brings generative artificial intelligence capabilities to Word, Excel and other applications for consumers. That revenue has shown up in Productivity and Business Processes since Copilot Pro’s introduction 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, up from the range of $20.3 billion to $20.6 billion it provided in late July.

The forecast calls for Intelligent Cloud revenue between $23.80 billion and $24.10 billion, down from $28.6 billion to $28.9 billion. And it shows More Personal Computing revenue in the range of $12.25 billion to $12.65 billion, compared with $14.9 billion to $15.3 billion before.

But Microsoft continues to expect around $64.3 billion in revenue across the board. And it does not anticipate change to cost of revenue, operating expenses, other income and expense or tax rate.

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