Guesswork Needed to Make Sense of Microsoft Data
Microsoft’s FY22 Q4 results were curiously devoid of anything really interesting when it came to Office 365 data. No new numbers appeared for Office 365 as a whole or for individual workloads like Teams, Exchange Online, or SharePoint Online. As normal, people were left to interpret what might be happening based on individual nuggets of information for Microsoft Cloud revenue strewn across the briefing.
$100 Billion Landmark Reached
Microsoft maintained the steady growth for its nebulous “Microsoft Cloud” segment to reach $25 billion. On an annualized basis, the Microsoft Cloud now generates an annualized run rate of $100 billion revenue, or five times the goal for cloud revenues set by Satya Nadella in 2015 (Figure 1).
We learned that Office 365 commercial revenue grew 15% year over year, or 19% in constant currency (all numbers were affected by the strengthening dollar). But as we don’t know what the base number for Office 365 commercial revenue was last year, it’s impossible to calculate how much Office 365 brings in annually. Office 365 is lumped into the Microsoft Cloud reporting segment along with Azure, Dynamics 365, and LinkedIn.
Microsoft’s actual numbers for Microsoft Cloud over FY22 were:
- Q1: $20.7 billion
- Q2: $22.1 billion
- Q3: $23.4 billion
- Q4: $25 billion
Total: $91.2 billion.
From a margin perspective, Microsoft said that their gross margin for the Microsoft Cloud decreased slightly to 69%. Still 69% of $91.2 billion is $63 billion, which is a nice business in anyone’s definition.
Figuring Out Office 365 Revenues
In their discussion with market analysts, Microsoft revealed that LinkedIn brought in $11 billion (talent and marketing solutions) in the last year. Of the $80-odd billion left after taking out LinkedIn (from the $91.2 billion Microsoft Cloud revenues), I think we can divide the remainder as follows:
- Office 365: $46 billion
- Azure: $30 billion
- Dynamics 365/the rest: $4 billion(maybe).
Microsoft said that Office 365 paid seats grew 14% year over year. The last formal number given was 345 million paid seats, so it’s likely near 360 million now. If each paid seat generates $10/month for license fees and add-ons, that’s $43.2 billion. Microsoft made a big thing that the percentage of users paying for Office 365 E5 licenses is now 12% of the base (up from 8% last year), so $46 billion is not unreasonable.
As always, Microsoft emphasized the growing Average Revenue Per User (ARPU) they generate from Office 365 customers. At the scale Office 365 is at now, every additional dollar generates a huge amount of money. For instance, if Microsoft sold more E5 licenses and compliance add-ons and increased the average ARPU to $12/month, their annual revenue goes to $51.84 billion. This is why Microsoft sales teams are so eager to help customers understand the wonders of higher-priced licenses (Office 365 or Microsoft 365) and why the engineering groups deliver many new product features that require high-end licenses or add-ons.
Teams and Power Platform
Microsoft didn’t give a new number for Teams monthly active users, so we’re still working with the 270 million number from their FY22 Q2 results in January. Microsoft did say that Teams Phone now has over 12 million users, doubling the number in the last year. Teams Phone requires add-on dial plans and is a good example of how Microsoft is driving revenue from its installed base.
Microsoft also said that Power Platform has nearly 25 million monthly active users. That’s healthy growth but I do wonder how they count an active user of Power Platform. Are 2% of all Office 365 users active with Power Platform? It could be the case, but some more understanding of what active means here would be nice.
Onto The Next Stage in Cloud Evolution
It feels like the era of huge cloud growth is tapering off. Microsoft Cloud revenues will continue to grow, and this will remain a highly profitable business for Microsoft, but how long it will take for Office 365 to reach 500 million paid seats or Teams to reach 400 million monthly active users are open questions. I suspect Microsoft will achieve these landmarks, but they’ll require longer than the massive growth seen over the last five years.
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