Microsoft Cloud Growth Continues Unabated

Every thirteen weeks Microsoft releases its latest quarterly results. July 22 saw Microsoft’s FY20 Q4 results (to the end of June 2020) and as usual, some revealing gems about Microsoft’s businesses lurk in the information provided. Here’s what I picked out.

It’s All About the Cloud

From a cloud perspective, the big news was that Microsoft’s annual commercial cloud revenue passed $50 billion for the first time. At $14.3 billion for Q4, the annualized run rate is now around $57 billion and underscores just how important cloud products are to Microsoft.

Moderation in Small to Medium Businesses

Generally speaking, the Covid-19 pandemic helped Microsoft by driving demand in areas like cloud services (Teams especially) and devices (Surface). Microsoft also reported “weakness in small and medium business purchasing” which “drove some moderation to our Office 365 commercial paid seat growth.” One interpretation is that business problems for customers in the SME segment showed in some lack of demand for Office 365. Anecdotally, I’ve heard reports of tenants cutting back on licenses (where allowed by enterprise agreements) to reflect employee furloughs and layoffs. We might see more of this in the future as companies are weaned off national job support programs and are forced to consider redundancies to match reduced revenues.

Driving More Revenue Per Office 365 User

On the upside, Microsoft said that Office 365 commercial revenue grew 22 percent in constant currency, driven by “higher ARPU (average revenue per user)” due to a “strong upsell to Office 365 and Microsoft 365 E5.” The focus on driving ARPU has been a constant theme for the past few quarters. Microsoft salespeople are very committed to convince customers to move from Office 365 E3 to E5 and move from Office 365 to Microsoft 365. Engineering does its part by introducing new features that need E5 licenses.

Although the gap in monthly fee between E3 and E5 seems quite big, you get lots more functionality with E5, especially in data governance, compliance, and automation. Microsoft announced their intention to give E5 users 120 minutes of PSTN domestic calls, but subsequently dropped this idea. Even so, if you analyze all the different pieces in E5 over E3, the $15 monthly extra (in the U.S.) doesn’t seem quite so big.

Longer Deprecation Brings Big Gains

Microsoft has hundreds of thousands of servers and lots of networking equipment deployed in their cloud infrastructure. They announced a change in their deprecation policy for these assets so that they are written down over four years instead of three. This results in a $2.7 billion gain in a full fiscal year and will add 4 points year over year to the gross margin for Microsoft commercial cloud. That’s a huge amount, but it means that Microsoft has $10 billion or thereabouts worth of servers and network equipment on their books. The sheer size of the gain illustrates the investment Microsoft has made to build out and equip its datacenters.

Statistics and Facts

Other interesting numbers revealed:

• Azure Active Directory has 345 million monthly active users in 200,000 organizations. Many of these are Office 365 tenants.
• EMS is now at 147 million, strong growth from the 120 million number given in October 2019. Given the most recent number for Office 365 (paid seats) at 248 million – including many SME tenants, we can conclude that most large Office 365 tenants now use EMS.
• Although Microsoft didn’t update the number of Teams users from the 75 million claimed in April, they noted that 69 organizations now have more than 100,000 Teams users (including Accenture, which is still the largest Teams user at “more than 500,000 users.” Microsoft also said that 1,800 organizations have more than 10,000 Teams users.
• In June 2020, Microsoft’s Azure Cognitive Services platform transcribed 9 million hours of speech. Much of that is surely the generation of Stream transcripts for Teams meeting recordings. In April, Teams clocked up 4.1 billion daily meeting minutes, or 2.05 billion hours (for a 30-day month). Assuming that the growth in Teams online meetings has continued unabated since, its recordings are generating a lot of work for Cognitive Services.