Annualized Run Rate for Commercial Cloud Now $50 billion
Unsurprisingly, Microsoft’s FY20 Q2 results reported on January 29 featured another boost in commercial cloud revenues to $12.5 billion (Figure 1). The annualized run rate of $50 billion far surpasses the original $20 billion goal set by Satya Nadella in 2015 and attained in 2017. Although Microsoft doesn’t break out the numbers for the products in this segment, the sheer size of Office 365 means that the suite is a big part of the growing revenue stream with a 30% growth in commercial revenue (constant currency).
Office 365 Numbers
Although Microsoft said that Office 365 seats grew 21% (YoY), they didn’t share a new number for monthly active users (200 million in October 2019). The lack of a new number was expected because Microsoft usually updates it every six months. The reported growth in seats indicates that the number of active Office 365 users is still increasing at between 3 and 4 million per month. The percentage increase in seats has slowed (Figure 2), probably because of the growing size of the user base. If, as expected, Microsoft reports a new number in their Q3 results in April, it should be in the 220 – 225 million range.
Increasing Revenue from Users
Microsoft hasn’t increased its Office 365 prices since the introduction of the service in June 2011. That doesn’t mean they don’t have a keen eye on increasing the amount they charge organizations for Office 365. Some increase comes from growing numbers, but Microsoft’s focus is on the Average Revenue Per User (APRU), which CFO Amy Hood reported as “higher” in the earnings call. What this means is that Microsoft is succeeding in:
- Selling higher-price Office 365 plans to tenants. For example, moving people from Office 365 E3 to E5 to gain advantage of features like Advanced Threat Protection, Advanced eDiscovery, and Office 365 Cloud App Security.
- Selling add-ons like Advanced Compliance, Azure Active Directory Premium, and Azure Information Protection Premium.
- Converting Office 365 plans to Microsoft 365 plans. Microsoft acknowledges that they enjoy “an increasing mix from our Microsoft 365 suite” but a better indication of what’s happening is that the number of Enterprise Mobility and Security subscribers is now 127 million. This must mean that a large percentage of Office 365 enterprise tenants now use EM&S.
Microsoft’s cloud juggernaut rolls on. With new datacenter regions coming online to serve in-country tenants and a mass of new features delivered every quarter, there’s no sign of the end of the growth road appearing yet. Quite how long this can last is anyone’s guess.
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