Microsoft Cloud Hits $111.6 Billion Annual Revenue

Microsoft FY23 Q4 Continues Strong Microsoft Cloud Revenues

As has become customary, Microsoft enjoyed another strong quarter of Microsoft Cloud revenues in the final quarter of their FY23 fiscal year. The headline numbers for the quarter have been reported and analyzed in depth elsewhere. I want to focus on the data relevant to the Microsoft 365 ecosystem. For those interested in following up, I suggest reading the transcript of the analyst briefing together with the other information released by Microsoft.

Microsoft Cloud Hits $110 Billion

The first point is that annual revenues for the Microsoft Cloud exceeded the $110 billion mark. The figures for the four quarters are:

• Q1: $25.7 billion.
• Q2: $27.1 billion.
• Q3: $28.5 billion.
• Q4: $30.3 billion.

Total: $111.6 billion.

On annualized run rate basis (taking the last quarter and multiplying by four), the run rate is now $121.2 billion, up $21.2 billion since the results reported for FY22 Q4. Figure 1 shows the steady growth in Microsoft Cloud annualized revenues since 2015.

The really interesting bit of information revealed by Satya Nadella was that “Azure all-up accounting for more than 50% of the total” ($110 billion). Microsoft is notoriously slow at giving out firm data about product revenues. A year ago, I tried to estimate how much Office 365 contributes to Microsoft cloud revenues. Taking numbers revealed in the briefing we can say that:

• Azure (50% of $110 billion) = $55 billion.
• Dynamics (“surpassed $5 billion in revenue over the past fiscal year”) = $5billion.
• LinkedIn (“surpassed $15 billion for the first time”) = $15 billion.
• Office 365 ($111.6 billion – ($55 + $5 + $15) = $36.1 billion. Microsoft said that “Office 365 commercial revenue increased 15% and 17% in constant currency, a bit better than expected with particular strength in E5.” Microsoft expects revenue grpwth of 16% for Office 365 in FY24.

The Office 365 outcome is less than I expected, but the Azure number is far higher than I thought.

Microsoft Cloud Revenue, Profitability, and Copilot

Microsoft CFO Amy Hood said that “Microsoft Cloud gross margin percentage increased roughly 3 points year-over-year to 72%.” The Microsoft Cloud is obviously a rich source of profit for Microsoft, even if they have substantial capital expenditure to equip their datacenters with computing and network equipment needed to deliver the service and prepare for new services, like Microsoft 365 Copilot.

Hood was confident that Microsoft’s “upsell and attach motions, particularly with Microsoft 365 E5.” She has made much the same comment to analysts for the past several quarterly briefings. Microsoft is very focused on driving the annual revenue per user (ARPU) to fuel growth in overall cloud revenues and profitability.

An interesting remark from the CFO observed that “Growth of new business continued to be moderated for products sold outside the Microsoft 365 suite including standalone Office 365, (and) EMS.” This isn’t surprising because the Microsoft sales force is focused on selling Microsoft 365 rather than the traditional Office 365 or EMS licenses.

Speaking of Microsoft 365 Copilot, they said “We are now rolling out Microsoft 365 Copilot to 600 paid customers through our early access program, and feedback from organizations like Emirates NBD, General Motors, Goodyear, and Lumen is that it’s a game changer for employee productivity.” Of course, as Hood acknowledged, Microsoft is unable to book revenue for Microsoft 365 Copilot until the product is generally available. No one knows how customers will respond to the pricing strategy both in terms of the high $30/user/month license cost and the need for enterprise customers to move to Microsoft 365 E3 or E5 to become “eligible” for a Copilot deployment.

Some Other Numbers

Microsoft always embellishes its results with some numbers for product usage. Often, the numbers are

• Power Automate now has 10 million monthly active users.
• Teams Premium has more than 600,000 seats (Microsoft likes to use the word “surpassed” when discussing results). Six hundred thousand seats sounds like a big number, but it’s only 0.2% of the Teams 300 million monthly active user count, which puts the number into perspective.
• “Teams Phone is the market leader in cloud calling, with more than 17 million PSTN users, up 45% year-over-year.” Sounds like a lot of customers are junking traditional PBXes to move to Teams Phone.
• “Viva now has 35 million monthly active users.” Microsoft didn’t say what parts of the Viva Suite attract this usage. It would be interesting to know if usage comes from repurposed bits (like Viva Engage/ex-Yammer) that don’t bring in any extra revenue, or newer components (like Viva Topics or Viva Learning) where customers need to buy new licenses.
• The newly rebranded Microsoft Entra ID (ex-Azure AD) now has “more than 610 million monthly active users.”
• “The enterprise mobility and security installed base grew 11% to over 256 million seats.”

Microsoft didn’t give new numbers for Office 365, but given that “paid Office 365 commercial seats grew 11% year-over-year,” the number for Office 365 paid seats is likely around 400 million. It looks as if Microsoft Cloud revenues are heading for another good year in FY24.

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