Microsoft told investors Azure grew 41%. It did not say 41% of what.
There is no dollar amount for Azure in the filing and no prior-year base to divide into. The figure floats. That is an unusual thing for the most important product line at one of the largest companies on earth.
What we can see
Azure sits inside a segment called Intelligent Cloud, and that segment does get reported. Revenue rose 30% to about $138 billion. Operating income came in near $57 billion, up 28%.
| Intelligent Cloud | Figure | Change |
|---|---|---|
| Revenue | ~$138B | +30% |
| Cost of revenue | $58B | +44% |
| Operating expenses | $23B | +7% |
| Operating income | ~$57B | +28% |
Read the middle two lines together. Cost of revenue — what it costs to actually deliver the service — grew 44%, faster than the 30% revenue growth. Operating expenses grew only 7%.
In other words, the profit growth is being protected by holding down overhead while the cost of running the machines climbs faster than the sales they produce. That is sustainable for a while. It is not sustainable forever.
The two capital-spending numbers
Microsoft states capital spending of $145.3 billion including finance leases. The cash-flow statement shows $115.9 billion of additions to property and equipment.
Those two figures are almost $30 billion apart. The gap is finance leases — long-term commitments to use equipment and buildings the company does not buy outright. It is a legitimate accounting distinction, and it is also a very large number to have living in the space between two disclosures.
On the July call, management said Azure had topped $100 billion of revenue. That number appears on a conference call. It does not appear in the filing.
The OpenAI thread
Microsoft owns roughly 25% of OpenAI. It recorded $24.1 billion of revenue from OpenAI last year and carries about $6 billion of receivables from it.
That means a meaningful slice of the growth in the cloud business is being bought by a company Microsoft part-owns, on credit that Microsoft is extending. This is not improper and it is disclosed. It also means the customer, the shareholder and the lender are partly the same entity.
What we actually do
We are not selling Microsoft on a disclosure complaint. This is a company with enormous real profits, and the segment numbers we can see are genuinely strong.
But a growth rate without a base is the kind of thing that gets disclosed properly right up until the moment the base stops being flattering. When a company chooses which number to make prominent, that choice carries information.
So Microsoft stays a holding and moves onto the watch list at its current weight. What we read each quarter is the cost-of-revenue line against the revenue line, and whether a dollar figure for Azure ever appears in a filing rather than on a call.