Table of Contents
Microsoft FY24 Q3 Results Demonstrates Continuing Cloud Strength
Microsoft cloud revenues had an annual run rate of $140.4 billion based on the quarterly revenue of $35.1 billion. A year ago, the comparable figures were $114 billion and $28,5 billion, meaning that Microsoft grew cloud revenues by 23% year over year. Cloud revenues represented just over 50% of Microsoft overall revenues of $69.1 billion. From a profitability standpoint, the gross margin for Microsoft cloud was 72% ($25.27 billion), or 58.23% of Microsoft’s overall gross margin. That’s a healthy margin at a time when Microsoft is investing heavily in its datacenter infrastructure to accommodate the demands of AI-based services.
More details about the FY24 Q3 results are available on Microsoft’s website.
Office 365 Seat Growth Slows in Percentage Terms
In their FY24 Q2 results, Microsoft said that the number of Office 365 paid seats had reached “over 400 million.” Given that Office 365 has so many customers, it’s unsurprising that the percentage growth in seats is slowing. Over the last year, the year-over-year rate has decreased from 11% to 8% (Figure 1). Still, 8% of 400 million is still an additional 32 million seats annually. Microsoft said that seat growth was driven by their “small to medium business and frontline worker offerings,” implying that larger companies have mostly moved to the cloud at this point, 13 years after the launch of Office 365.
Given that large enterprises tend to be better at keeping on-premises servers up to date, I wonder if the campaign to stop obsolete Exchange on-premises servers (Exchange 2013 and below) sending email to Exchange Online is convincing small to medium businesses to move to the cloud. If so, that’s a good thing. If you can’t maintain an Exchange server, it’s time to use a cloud-based email service.
Microsoft notes that revenue growth is ahead of seat growth driven partially by higher average revenue per user (ARPU). This comes about when Microsoft sells add-ons and higher-priced plans to customers. Copilot for Microsoft is particularly notable here because not only is Copilot a high-cost add-on ($360/user/year) but Microsoft does its level best to convince customers that they get better Copilot results with higher-priced E5 plans.
Microsoft expects Office 365 revenue growth to get an uptick to 14% in the coming quarter with progress with “adoption of Copilot for Microsoft 365” being cited as a reason.
Numbers
Microsoft didn’t reveal new numbers for users or paid seats for Office 365 or Teams. However, they did say that Power Apps has reached 25 million monthly active users, and that Teams Rooms hit the one million mark. They also shared that 20 million people use Teams Phone for PSTN access.
They also reported that GitHub Copilot has 1.8 million paid subscribers. I’ve been using GitHub Copilot for several months and consider it a bargain at $10/month. I write PowerShell scripts in Visual Studio Code and find the GitHub Copilot plug-in works well. At times, it is uncanny at its ability to predict the code to insert. I guess I must be very predictable…
Speaking of Copilot, Microsoft said that 60% of the Fortune 500 use Copilot for Microsoft 365. That seems impressive but given that an organization can run a trial with exactly one Copilot license, it might represent just 300 seats. Given the size of these companies and their relationship with Microsoft, I know that the number is far higher (and Microsoft cited some examples of customers with over 10,000 seats), but it does prove that you shouldn’t take a statistic at face value without thinking through what it might mean.
A sign of Microsoft’s current focus is that Copilot appeared regularly in the transcript of the earnings call with analysts. Of the 8,797 total words spoken, Copilot was mentioned 41 times compared to Microsoft 365 (14) and Office 365 (7). Azure scored highest at 46 mentions. Even if Copilot isn’t yet generating the kind of revenue Microsoft aims for, there’s no doubt that driving Copilot sales to increase the usage of Azure to offset the massive capital investment in datacenter infrastructure is top of mind for their senior leadership.
Next Week in Orlando
Next week I shall be at the M365 “community conference” in Orlando. If you’re at the event, be sure to come by either of my sessions:
- Mastering the Microsoft Graph PowerShell SDK (Tuesday at 11:30AM in the Mockingbird 2 room in the Swan hotel). We’ll discuss how the SDK leverages Graph APIs to get to all parts of Microsoft 365.
- Don’t let Copilot for Microsoft 365 be a vanity project (Wednesday at 8AM in the Pelican 2 room in the Swan hotel): Navigating through the hype surrounding Copilot for Microsoft 365 to seek measurable business results by deploying Copilot. Or something like that.
Don’t be slow to say hello at either session!
Support the work of the Office 365 for IT Pros team by subscribing to the Office 365 for IT Pros eBook. Your support pays for the time we need to track, analyze, and document the changing world of Microsoft 365 and Office 365.