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But the Microsoft Cloud Juggernaut Keeps on Trucking
Another quarter, another set of Microsoft results to ponder, including the transcript of the comments made by CEO Satya Nadella and CFO Amy Hood to market analysts. The numbers showed the effect of some softening in demand and the effect of a stronger dollar, but Microsoft still posted first quarter revenue of $50.1 billion, up 16 percent in constant currency.
Microsoft reported that Office 365 commercial revenue 11 percent (17 percent in constant currency). They said that growth came from expanding the installed base across all workloads and by generating more revenue from E5 licenses. The fact that many high-end (desirable) security, compliance, and voice features is a big reason for customers to upgrade their licenses. As Amy Hood observed “we saw good upsell to E5.” She also said that “more than half of the 10-million-dollar-plus Microsoft 365 bookings came from E5.”
Microsoft Cloud revenues reached $25.7 billion (31 percent year-over-year growth in constant currency), or an annualized run rate of $102.8 billion. The increase in Q1 over the $25 billion achieved in FY22 Q4 was relatively small. Then again, a sales push always happens in the last quarter of a financial year, especially when a $100 billion ARR landmark is there to attain.
Microsoft Cloud gross margin percentage increased to 73 percent. Cloud Services is a great business to be in when you operate it at the scale that Microsoft does.
Office 365 Numbers
For years, Microsoft emphasized the success of Office 365 and Teams by regularly providing new numbers for monthly active users, or lately, paid seats for Office 365. Over the last few quarterly results briefings, they’ve become cagier about these numbers, possibly due to slowing growth.
The last reported figure for Office 365 paid seats was 345 million in April 2022. Applying 7% growth to that figure (half of the 14% growth reported by Microsoft), the number of Office 365 paid seats could now be around 370 million (plus or minus a few million).
Teams Numbers
Microsoft didn’t give any number for Teams users, so we remain at the 270 million reported in January 2022. Instead, Satya Nadella gave out some of the statistics beloved by Microsoft that lack any context to help people understand the real importance of the data. He said that “Users interact with Teams 1,500 times per month on average” but didn’t explain how Microsoft counts interactions or if different kinds of interactions are deemed more important. For instance, does clicking the activity feed merit the same level of interaction as making a VOIP call? Does reacting to a chat message with an emoji rate the same as a carefully considered text response spanning several paragraphs.
Nadella also said that “In a typical day, the average commercial user spends more time in Teams chat than they do in e-mail.” Again, no context to explain how Microsoft arrived at this conclusion. For instance, does simply keeping Teams chat open mean that a user is spending time in the app? How can you compare a chat conversation that can span multiple to-and-fro interactions with responding to an email? Microsoft might be able to gather data from their clients and their services, but holes exist when people use non-Microsoft clients like mobile clients based on Exchange ActiveSync or POP3/IMAP4 desktop clients.
Another example is “the number of users who use four or more features within Teams increased over 20 percent year over year.” Indeed, and who would be surprised at this outcome given Microsoft’s propensity to stuff as many features into Teams (like the entire Viva suite) as possible. In fact, a case can be argued that given the number of features now available through Teams, a fairer measurement might be ten or more features.
In any case, these are made statistics thrown out to impress market analysts that really don’t give any insight into how people use Teams. What was more interesting is the tidbit that “over 55 percent of our enterprise customers who use Teams today also buy Teams Rooms or Teams Phone.” The recent announcement of Teams Premium also merited a mention, perhaps because Microsoft hopes that the $10/user/month they plan to charge for this license will increase the average revenue per user (ARPU) figure Microsoft loves to highlight to market analysts.
Other Microsoft Cloud Facts and Stats
In February 2022, Microsoft said that its Viva suite had ten million monthly active users. Now the number is “more than 20 million monthly active users.” Doubling the number of Viva users in nine months is pretty good, but it’s got to be viewed in the context of the immense marketing effort Microsoft has dedicated to their employee engagement platform and the size of the Office 365 base. There’s lots of room for Viva to grow.
Microsoft noted that Power Apps (“the market leader in low-code/no-code tools”) has “nearly 15 million monthly active users, up more than 50 percent compared to a year ago.” Possibly more relevant to Microsoft 365 is the Power Automate number, now at “over 7 million monthly active users.”
Finally, one of Microsoft 365’s strengths is the worldwide data center network that hosts its services. Microsoft invested billions to build the network, and its operating expenses are massive too. An insight to the costs involved was the discussion between Amy Hood and a market analyst about the impact of increased energy costs where it was revealed that the extra cost will be over $800 million for FY23, currently running at $250-ish million a quarter. Data centers consume lots of power and cooling. In Ireland, Microsoft has applied to deploy large numbers of generators to keep its data centers running and perhaps keep those energy costs down.
The growth in Microsoft Cloud revenues is likely to keep on going. Perhaps not so much through growing its installed base, but definitely by making sure that Microsoft Cloud customers have the maximum reason to buy high-end add-on licenses to meet their security, compliance, and automation requirements. There’s nothing wrong with the way Microsoft attempts to extract more revenues from its customers. It’s just business.