Strong Office 365 and Azure Growth Delivers $18.9 Billion Annual Revenues

Datacenter networking servers

Cloud Money, Money, Money

It is results time again and Microsoft released earnings for Q4 FY17 on July 20. As always, there are nuggets to be minded from the data provided by Microsoft, including the transcript of the call with analysts. The billions of cloud revenues generated by Azure and Office 365 are the highlights for me, even if Microsoft did not update the number of Office 365 users.

Within Touching Distance of Nadella’s $20 Billion Goal

In her comments to analysts, Microsoft CFO Amy Hood said, “for the first time, Office 365 commercial revenue surpassed revenue from our traditional licensing business.” In other words, the balance in revenue between on-premises and cloud Office servers has now tilted to the cloud. Allied with a 97% year-over-year growth in Azure boosted by the “highest-ever number of multi-million dollar Azure deals,” Microsoft’s annualized revenue run-rate (ARR) for commercial cloud products zoomed by $3.7 billion in the quarter to $18.9 billion. The year-over-year growth for Office 365 was 43%.

Overall growth in the commercial cloud products ARR for the year was $6.8 billion and Microsoft is now within a quarter of reaching Satya Nadella’s goal of $20 billion ARR by the end of their FY18 year. Table 1 lists how the ARR has grown quite dramatically since April 2015.

Quarter results Microsoft reported annualized revenue run rate for commercial cloud products
FY15 Q3 (April 2015) $6.3 billion
FY15 Q4 (July 2015) $8.0 billion
FY16 Q4 (July 2016) $12.1 billion
FY17 Q1 (October 2016) Over $13 billion
FY17 Q2 (January 2017) Over $14 billion
FY17 Q3 (April 2017) $15.2 billion
FY17 Q4 (July 2017) $18.9 billion

Table 1: Annualized revenue run rate for Microsoft commercial cloud products (source: Microsoft quarterly statements)

ARR versus Actual Revenues

Of course, an annualized revenue run-rate is different from actual revenues. The ARR is “calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics 365, and other cloud properties.” In other words, the ARR reported here is based on June 2017 numbers ($1.575 billion * 12). Because companies traditionally like to have a blow-out final quarter to make their numbers for the year, the last month in a fiscal year might not be a typical month and it will be interesting to see whether Microsoft keeps up the same rate of progress in the Q1 FY18 results

Even so, Microsoft reported an impressive $15 billion revenues for commercial cloud products, which is a more realistic measurement of the cloud cash flowing into Redmond’s coffers.

No New Number for Office 365 Users

One data point Microsoft did not update was the number of monthly active Office 365 users (MAU). In April 2017, we heard that the MAU was “more than 100 million.” Given the Q4 results, I am pretty sure that Microsoft is gaining about 3 million extra users monthly and will reach 120 MAU by the end of calendar 2017. Some of the gain comes from more SharePoint activity, which Microsoft says has doubled in the last year, but the continued movement from all the on-premises servers underpins the MAU growth.

I was also interested to note that the profitability of commercial cloud products (gross margin of 52%) lags that for Microsoft (66%). This might be due to the continuing investment in new datacenters for Office 365 and Azure such as the South African region due to come online in early 2018.

Cloud Success

There is no doubt that Microsoft is mining a rich vein of cloud success at present. All the indicators are pointing the right way. However, work still needs to be done to maintain progress and to fix some of the gaps that exist in cloud services that prevent customers moving. Ignite is now just two months away and I expect to hear a lot more there about what Microsoft plans to do in Azure and Office 365. It should be an interesting event.

Follow Tony on Twitter @12Knocksinna.

Want to know more about how to manage Office 365? Find what you need to know in “Office 365 for IT Pros”, the most comprehensive eBook covering all aspects of Office 365. Available in PDF and EPUB formats (suitable for iBooks) or for Amazon Kindle.