Microsoft restructures its reporting process to enhance visibility into cloud revenue consumption.

• Microsoft announced that it will remove two components from the revenue growth metric it releases every quarter for Azure and other cloud services.
• One analyst stated that the growing Azure cloud infrastructure business competes with Amazon Web Services and provides a better understanding of its performance.

The software maker updated its quarterly revenue guidance for its three business segments on Wednesday, providing investors with better visibility into its growing cloud infrastructure business.

The Intelligent Cloud unit, which includes Azure, is now expanding the Productivity and Business Processes segment that encompasses office productivity software subscriptions and associated services.

Windows commercial products and cloud services, which are part of the More Personal Computing segment, will also improve productivity and business processes through volume licensing of the Windows operating system and cloud-based Windows tools.

Azure and other cloud services' closely watched year-over-year growth metric, which includes the removal of Power BI data analytics tool and the Enterprise Mobility and Security group of products, is being updated by Microsoft.

The departure of two clients has led to a closer alignment of Azure's new number with a consumption-based business model, as Microsoft stated in a presentation to investors. Consumption refers to commercial clients actively utilizing Azure's computing and storage services.

Microsoft is shifting revenue from its search and news advertising category, previously under More Personal Computing, to Azure and other cloud services.

Azure and other cloud services are expected to experience 33% constant-currency revenue growth in the fiscal first quarter, according to the company. This is a decrease of 1 to 2 percentage points from the fiscal fourth quarter. In late July, the company had predicted growth of 28% to 29% at constant currency based on the prior Azure definition. Historically, consumption has been the primary driver of growth in Azure and other cloud services, rather than the per-user tools, where growth in the number of seats has slowed.

"Azure growth is now more transparent due to the removal of per-user elements, as stated by Jason Ader, a William Blair analyst with a buy rating on Microsoft shares," said Jason Ader, a William Blair analyst with a buy rating on Microsoft shares.

Amazon Web Services discloses revenue, but Microsoft's Azure financial reporting method features per-user pieces, making comparisons challenging.

Microsoft will disclose a combined growth rate for Windows and devices every quarter, and will allocate some revenue from its 2022 Nuance Communications acquisition to Productivity and Business Processes under Intelligent Cloud.

Microsoft has introduced a new metric called Microsoft 365 Commercial, which will be included in the Productivity and Business Processes segment. This metric will encompass revenue from Office commercial products and cloud services, Power BI, Enterprise Mobility and Security, and Windows commercial products and cloud services. The change is aimed at better aligning how the business is managed, as Microsoft stated in the presentation.

Ader stated that the company's focus on Productivity and Business Processes may make it harder for investors to comprehend the health of core commercial subscriptions for Office productivity software. Although a slowdown in growth is a minor concern among investors, Ader emphasized the importance of understanding the company's core business.

Copilot Pro, which offers generative artificial intelligence capabilities for Word, Excel, and other applications, has been generating revenue for the More Personal Computing segment through subscriptions. This revenue has been reflected in the Productivity and Business Processes segment since its launch earlier this year.

Microsoft now anticipates $27.75 billion to $28.05 billion in revenue for the Productivity and Business Processes Segment in the fiscal first quarter, an increase from the previously stated range of $20.3 billion to $20.6 billion.

The forecast predicts that Intelligent Cloud revenue will be between $23.80 billion and $24.10 billion, a decrease from the previous forecast of $28.6 billion to $28.9 billion. Additionally, the forecast shows that More Personal Computing revenue will be in the range of $12.25 billion to $12.65 billion, a decrease from the previous forecast of $14.9 billion to $15.3 billion.

Microsoft anticipates $64.3 billion in revenue across the board, with no expected changes to cost of revenue, operating expenses, other income and expense, or tax rate.

Jefferies' Brent Thill predicts that rotation from AI infrastructure to software will occur later in 2024.