Abstract:
Microsoft has discussed significant cost cuts in its Azure cloud server rental business, according to people familiar with the matter. Girish Bablani, president of the Azure unit, has in recent weeks directed executives at his team of about 11,500 employees to find ways to reduce costs by at least 20%; however, it's unclear whether such reductions include layoffs.
Microsoft's cost-cutting discussions come despite accelerating Azure revenue growth, underscoring the heavy burden that data center spending is placing on the company's finances.
The company has not yet finalized any cost-cutting measures and plans could still change, people familiar with the matter said. Babrani is responsible for only one department within Azure, and the entire cloud business unit has a total of about 60,000 employees. ·Babrani’s department is responsible for developing software related to the cloud server business and is not part of the Azure data center team.
A Microsoft spokesperson said in a statement: "Azure leadership has not directed the team to develop a cost-cutting plan. Any responsible company will prepare for a variety of market dynamics and scenarios, whether positive or negative. This kind of reporting is neither accurate nor rigorous."
In order to cut some costs, Microsoft may lay off external contractors in its cloud business unit, according to people familiar with the matter.
In recent months, some Azure executives have privately cited the cost of talent retention as another reason for possible layoffs, in addition to high data center expenses. Microsoft has had to take steps to address these competitive pay packages as its rivals in artificial intelligence, such as Anthropic and Meta, recruit or try to poach Microsoft employees, according to people familiar with the matter.
As the company automates more tasks, Azure chief Scott Guthrie has also expressed a desire to increase budgets related to artificial intelligence (AI) for existing employees, according to people familiar with the matter. In recent months, Microsoft has been increasing its investment in AI per employee and encouraging employees to use AI to increase productivity in areas such as sales and software development. Microsoft's headcount was down slightly as of June from a year ago, after several rounds of layoffs and voluntary separation programs.
Although other major cloud service providers such as Oracle and Amazon AWS have increased capital expenditures on AI data centers, resulting in a hit to their respective free cash flows, they have also taken cost-cutting measures including layoffs while trying to boost revenue growth.
These discussions within Microsoft come as the company reorganizes its cloud business unit around executive Arun Ulag. In recent months, many senior executives have reduced their responsibilities or retired. Microsoft CEO Satya Nadella has promoted a small group of new generation managers, and Urag is one of them. According to people familiar with the matter, Urage, who was previously responsible for Azure database products, will now oversee a group of executives in Azure core business (Azure Core). Azure Core provides computing power to customers such as OpenAI. This group of executives includes Bablani, Billy Anders, Douglas Phillips and Mark Russinovich.
Faced with Microsoft's AI competitors such as Anthropic and Meta poaching (or trying to poach) their own employees, Microsoft has to come up with a response plan to compete with the generous employment conditions offered by such competing products.
Azure chief Scott Guthrie announced the structural changes within the company on Monday, saying that Urager still reports to him.
People familiar with the reorganization revealed that Charlie Bell, who resigned as head of Microsoft's security business earlier this year and became a consultant, will now join Urag's management team, but will still report directly to CEO Satya Nadella. This further reflects Ulag’s rising status within the Azure system.
Azure has long been a key growth engine for the company, but Microsoft only began releasing revenue figures for the unit in specific dollar amounts last month. Data shows that in the 12 months ending in June, Azure generated revenue of US$101.9 billion, a year-on-year increase of 40%; in the June quarter alone, its revenue increased by 43%. By comparison, AWS' full-year revenue during the same period was nearly $150 billion, including 37% growth in the second quarter of this year.
While Azure's 40% revenue growth was impressive, the division was also reportedly negatively affected by Microsoft's decision to pause a series of data center projects early last year. Even so, the division's current revenue accounts for about 31% of Microsoft's total revenue.
At the same time, investment in artificial intelligence (AI) data centers has also put some pressure on its cash flow. The company generated $20 billion in free cash flow in the June quarter, an increase of more than $4 billion from the first quarter but a 20% decrease from the same period last year (i.e., the second quarter of last year).
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