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Teams User Numbers Slow as Office 365 Grows 12%
One thing that’s obvious from the Microsoft FY23 Q2 results released on January 24 is that the woes of the wider economy is affecting the growth of the Microsoft Cloud. This is despite headline growth to achieve $27.1 billion in quarterly revenue ($108.4 billion annualized run rate), up 22% year over year (or 29% in constant currency, reflecting the recent strength of the dollar). However, Microsoft had “slower than expected growth in new business” in Office 365 and EMS.
Revenue for Office 365 commercial increased 11% YoY (18% in constant currency). Microsoft said that this reflected “healthy renewal execution” and growth in annual revenue per user (ARPU) because “E5 momentum remains strong.” A cynic might say that Microsoft is now sweating its massive installed base. Customers have no real choice but to renew as the costs and technical difficulties involved in getting off Office 365 are massive. Microsoft drives ARPU by making sure that new features appear in the high-end SKUs. For example, if you want any automation for compliance or security functionality, you need an E5 SKU.
Driving users to buy E5 to get better security functionality is one reason why Microsoft was able to announce that its security business surpassed $20 billion (annually) in revenue. The security business includes products commonly used with Office 365 like Microsoft Purview, Microsoft Entra (think Azure AD), Microsoft Sentinel, Microsoft Intune, and Microsoft Defender. Some of these capabilities are bundled with Office 365 E3, but high-end Purview security and compliance functionality like adaptive scopes or automatic label policies or Defender Plan 2 require Office 365 E5. And Azure AD Premium P1 and P2 licenses are needed for features like conditional access policies and privileged identity management.
Office 365 User Base Approaches 400 Million
Probably deliberately to obfuscate comparisons, Microsoft hasn’t given a firm number for Office 365 active users since October 2019 when they reported 200 million monthly active users. Since then, they’ve focused on reporting growth percentages and paid seats, like the 345 million paid seats highlighted in April 2022. This time round, they said that Office 365 commercial seats grew 12% YoY and observed that small-to-medium business and frontline worker offerings drove the growth. Microsoft also said that they “saw some impact from the slowdown in growth of new business” and that they expect revenue growth to be lower in the coming quarter by about one percentage point.
During the analyst Q&A, Brad Reback from Stifel put forward a 400 million seat number for Office 365 and asked if Microsoft would concentrate on growth in seats or ARPU. In his response, CEO Satya Nadella acknowledged “moderating seat growth” balanced by increased ARPU due to more customers taking up E5 licenses. Nadella also points to Teams Premium (referred to as Team Pro in the transcript) as an opportunity for increased ARPU.
I think the number of paid Office 365 seats is a tad below 400 million (maybe around 385 million) but it’s hard to know. The number of actual real-live human beings who use Office 365 daily is lower at maybe 360 million. Either way, it’s a big number of users that is still growing albeit slower than before.
Teams User Number Reaches 280 Million
Speaking of Teams Premium, Microsoft gave an updated number for the user base that they can sell the new product to when Teams Premium becomes generally available in February 2023. A year ago, Microsoft said that Teams had 270 million monthly active users. Now the Teams user number is 280 million (Figure 1).
Microsoft claimed that the 3.57% growth in the Teams user number represented “durable momentum since the pandemic.” It’s curious that Teams grew at about a third of the rate of increase in Office 365 seats (12% YoY). Perhaps this is because those who want to use Teams are using it and relatively few in the small-to-medium and frontline segments where Microsoft says the Office 365 growth came from need Teams.
Microsoft usually throws out some gee-whiz statistics about Teams to help people in games of Office 365 trivial pursuit. This time round, we learned that there are more than 500,000 active Teams Rooms devices (up 70% YoY) and the number of customers with more than 1,000 Teams rooms doubled YoY. This might mean that two customers now have more than 1,000 Teams rooms instead of one last year. Microsoft didn’t clarify the point. However, they did assert that Teams Phone continues to grow its share and is now the market leader for cloud calling. Over 5 million Teams users with licenses for PSTN calling joined the Teams user mix over the last 12 months.
Balance Between New Seats and More Money Per Seat
It’s hard to grow big numbers. Microsoft continues to add seats to Office 365, but it seems like the new seats have low-end licenses, which is why they need to sell more high-end add-ons or more expensive licenses to the installed base to offset the relative lack of revenue fgenrom the new seats. Growth in Teams users is slowing, but the same aspects are visible in selling add-ons (like PSTN) and hoping that customers like what they see in Teams Premium enough to cough up the extra $10/user/month for licenses. You’ve got to keep that quarterly revenue number growing…
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