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According to people familiar with the matter, Microsoft (NASDAQ: MSFT) has discussed a major cost reduction in its Azure cloud server rental business. Girish Bablani, president of the Azure division, has in recent weeks instructed executives across his team of roughly 11,500 employees to find ways to cut costs by at least 20%; however, it is not yet clear whether such reductions will include layoffs.
Even though Azure's revenue growth is accelerating, Microsoft (NASDAQ: MSFT) still held these cost-cutting discussions, underscoring the heavy burden that data center spending places on the company's finances. The people familiar with the matter said the company has not finalized any cost-cutting measures, and the plans could still change. Bablani oversees only one division within Azure, while the entire cloud business unit has about 60,000 employees in total. Bablani's division is responsible for developing software related to the cloud server business and is not part of the Azure data center team.
A Microsoft (NASDAQ: MSFT) spokesperson said in a statement: "Azure leadership did not instruct teams to create cost-cutting plans. Any responsible company prepares for a variety of market dynamics and scenarios, whether positive or negative. This kind of reporting is neither accurate nor rigorous."
According to people familiar with the matter, to cut some costs, Microsoft (NASDAQ: MSFT) may reduce external contractors in the cloud business unit. In recent months, some Azure executives have privately pointed out that, in addition to high data center expenses, the cost of retaining talent is another reason for possible layoffs. According to the people familiar with the matter, as Microsoft (NASDAQ: MSFT) AI rivals such as Anthropic and Meta recruit or try to poach Microsoft (NASDAQ: MSFT) employees, the company has had to take steps to respond to these competitive compensation packages.
According to people familiar with the matter, as the company automates more tasks, Azure head Scott Guthrie has also expressed a willingness to increase the AI-related budget for existing employees. In recent months, Microsoft (NASDAQ: MSFT) has been increasing AI investment per employee and encouraging staff to use AI to improve productivity in areas such as sales and software development. After several rounds of layoffs and voluntary departure programs, Microsoft (NASDAQ: MSFT)'s total headcount as of June was slightly lower than a year earlier.
Although other major cloud providers such as Oracle and Amazon AWS have seen their free cash flow hit by increased capital spending on AI data centers, they have also taken cost-cutting measures, including layoffs, while trying to boost revenue growth. These internal discussions at Microsoft (NASDAQ: MSFT) come as the company reorganizes its cloud business unit around executive Arun Ulag. In recent months, several senior longtime executives have reduced their responsibilities or retired, and Microsoft (NASDAQ: MSFT) CEO Satya Nadella has promoted a small group of newer-generation managers, one of whom is Ulag.
According to people familiar with the matter, Ulag, who previously oversaw Azure database products, will now also oversee a group of executives in Azure Core. Azure Core provides computing power to customers such as OpenAI. These executives include Bablani, Billy Anders, Douglas Phillips, and Mark Russinovich. Faced with Microsoft (NASDAQ: MSFT) AI competitors such as Anthropic and Meta poaching, or trying to poach, its employees, Microsoft (NASDAQ: MSFT) has had to come up with a response to counter the generous hiring terms offered by such competitors.
Azure head Scott Guthrie announced the organizational adjustment internally on Monday, saying Ulag still reports to him. People familiar with the reorganization said Charlie Bell, who stepped down earlier this year as head of Microsoft (NASDAQ: MSFT) security business and moved to an advisory role, will now join Ulag's management team but will still report directly to CEO Satya Nadella. This further reflects the rise in Ulag's standing within the Azure system. Azure has long been a key growth engine for the company, but Microsoft (NASDAQ: MSFT) only began disclosing the unit's revenue figures in specific amounts last month.
Data shows that in the 12 months ended in June, Azure generated $101.9 billion in revenue, up 40% year over year; in the June quarter alone, its revenue grew 43%. By comparison, AWS's full-year revenue in the same period was nearly $150 billion, including 37% growth in this year's second quarter. Although Azure's 40% revenue growth is impressive, the unit has also reportedly been negatively affected by Microsoft (NASDAQ: MSFT)'s decision early last year to pause a series of data center projects. Even so, the unit's current revenue accounts for about 31% of Microsoft (NASDAQ: MSFT)'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, which, although more than $4 billion higher than the first quarter, was down 20% from the same period a year earlier, that is, last year's second quarter.
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