$22.1 Billion Revenues in FY22 Q2 Results
Microsoft closed out their FY22 Q2 results with revenue of $51.7 billion. Of this, Microsoft Cloud (mainly Office 365, Azure, Dynamics 365, and LinkedIn) accounted for $22.1 billion, up 32% year over year. It’s a very healthy outcome which underlines the importance of cloud services to Microsoft.
In remarks to analysts, CFO Amy Hood attributed the growth to “large, long-term Azure contracts, as well as increased usage of Teams and our advanced security and identity offerings.” She noted that the gross margin for Microsoft Cloud decreased slightly year-over-year to 70%. However, after excluding the impact from a change in how datacenter assets like servers and network controllers are accounted for over their useful life, she said that Microsoft Cloud gross margins increased by roughly 3%.
Office 365 Revenue and Numbers
In terms of Office 365, Microsoft failed to give specific user numbers for either active or paid seats. They said that Office 365 commercial revenue grew by 19% and cited higher average revenue per user (ARPU) and installed base expansion as driving factors. Microsoft noted that customer movement to higher-based plans such as Office 365 E5 to access better security (Microsoft Defender for Office 365 Plan 2), compliance (many features from auto-label policies to trainable classifier), and voice (calling plans, etc.) drove “continued momentum.” The increases in Office 365 and Microsoft 365 monthly subscriptions from March 1, 2022 will give another boost to cloud revenues.
Microsoft said that “paid Office 365 commercial seats increased 16% year-over-year.” In their Q3 FY21 results, Microsoft said that they had “nearly 300 million” paid seats. Nine months later, that number is probably around 330 million. However, that doesn’t mean that this is the number of monthly active users, with or without paid licenses. It could be that Microsoft has sold licenses that are not yet used but are still counted.
Interestingly, Microsoft said that growth was “driven by another strong quarter of growth in our small and medium business and frontline worker offerings. Later, in a response to an analyst question, Amy Hood noted that growth in SME tenants and those buying services for frontline workers “often come(s) at lower revenue per month than we would see in our enterprise businesses buying the full suite of products.” In other words, Microsoft can’t generate a high ARPU from SME customers.
In July 2021, Microsoft claimed 250 million monthly active users for Teams. At the time, I wondered if the number was believable. Now Microsoft has increased the figure to 270 million (Figure 2), a small percentage increase compared to recent large spurts in growth. The same doubts exist simply because Microsoft doesn’t give sufficient detail to understand how such a large percentage of the Office 365 base uses Teams. For instance, how many Teams users are in education versus enterprise? How many people use Teams consumer, even after the roll-out of chat interconnectivity between the consumer and enterprise versions? How many of the users logged as active are there because Windows 11 loads the Teams consumer client or Office loads the Teams enterprise client (both easy to turn off).
Instead of hard data, we get snippets designed for quotations, such as learning that Teams is “at the center of this digital fabric,” or that “over 90 percent of Fortune 500 companies used Teams Phone this quarter” (maybe they like the unlimited dial-in capabilities and Teams Phone plans). Or even that Walmart chose Teams for their “more than 2 million frontline users” (surely a Teams Walkie-Talkie case study in the making…). Huge customers like Walmart underpin the credibility of the Teams user number, while also underlining the point about lower profitability from frontline worker contracts (you can bet that Walmart got a good deal).
Microsoft launched Viva almost a year ago and rolled out Viva Insights, Viva Connections, Viva Learning, and Viva Topics since. Of all the offerings, I think Viva Topics has the most interesting technology. Microsoft has also rebranded MyAnalytics to bring it under the Viva brand, which is why Outlook and OWA now have the Viva Insights add-in.
Given the hype surrounding the launch and the importance of the “employee experience category” emphasized to the Microsoft sales force and partners, it was striking how little mention it received in the results briefing. Satya Nadella said that “Viva is being used by more than 1,000 paid customers… to help address challenges like employee burnout and retention.”
With the size of the Office 365 customer base and the emphasis on Teams as the delivery vehicle for Viva, I’m surprised that this number is so low. In July 2021, Microsoft said that 124 organizations had more than 100,000 Teams users and 3,000 organizations had more than 10,000 Teams users. You’d imagine that these organizations would be prime candidates for Viva. Perhaps the U.S.-centric approach often seen in Viva is an inhibiting factor for deployment in the rest of the world?
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