Microsoft FY16Q4 Results Show Strong Growth in Cloud Revenues

Tony Redmond

by Tony Redmond on 7/20/2016

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Azure, commercial cloud products, earnings, Microsoft, Office 365, results

Microsoft announced their FY16 Q4 results on July 19, 2016 and the market duly applauded. My eye was taken by the rather small subtitle on the results announcement that proclaims that the annualized revenue run rate for commercial cloud products had reached $12.1 billion, an increase of $4.1 billion over the year, underlining the strong growth in demand for cloud services.

Only Microsoft knows just how successful Office 365 really is and how many paid subscribers exist for its cloud services. This is commercially sensitive data and it should come as no surprise that they reveal as little real data about the numbers as they possibly can.

But Microsoft has to report accounting data to the SEC on a quarterly basis, which brings us to the latest set of results for the fourth quarter of their 2016 fiscal year (FY16 Q4), released on July 19. By their very nature, financial results can be pretty dull and dry documents. I was taken by the sub-title proclaiming that the revenue associated with commercial cloud products, which covers Azure, Dynamics CRM, and Office 365, has reached an annualized revenue run rate of $12.1 billion. The note in the accounts explained that this figure means:

Commercial cloud annualized revenue run rate is calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics Online, and other cloud properties.”

Although the results show that Azure is growing faster than Office 365 (108% versus 59% in constant currency), it’s reasonable to assume that Office 365 is a large part of the commercial cloud products revenue mix. Quite where the dividing line lies is known only to Microsoft, but I hazard a guess that Office 365 represents at least half that amount.

The 59% growth rate for Office 365 has slowed over the last four reporting periods (the growth rate was 70% in Q2 and 63% in Q3), but it is still moving forward and the growth indicates a continuing movement of workload away from on-premises systems to the cloud. During Microsoft’s concall with investment analysts, CFO Amy Hood acknowledged that the growth rate was slowing and said that it was due to the business “getting quite big.” In other words, the larger Office 365 becomes, the harder it is to achieve high rates of growth.

CEO Satya Nadella noted that the impact of the new E5 plan had not yet been felt as many customers need to take an architectural decision before some of the technologies in the plan can be used (like Advanced Security Management). Nevertheless, he noted that the increasing adoption of the higher-end E3 and E5 plans was key to driving an increase in the Office 365 ASP (Average Selling Price) in the future.

Another interesting statistic revealed in the results was the doubling of the customer base for the Enterprise Mobility Suite (EMS) to 33,000. If you use that number to assess the claim by Scott Guthrie that 40% of enterprise Office 365 tenants use EMS, the number of enterprise tenants is therefore around 82,500. Of course, some EMS customers might not use Office 365, but I think the vast majority do.

Although large customers usually get the headlines, perhaps a more important indication of the rate of movement to the cloud is seen in Microsoft’s assertion in January 2016 that 50,000 SMB businesses become Office 365 customers each month.

Microsoft also achieved good growth in the consumer version of Office 365 over FY16 with a net gain of 7.9 million users from 15.2 to 23.1 million.

The current $12.1 billion revenue run rate is over half-way to the goal set by CEO Satya Nadella of reaching a $20 billion run rate by June 2018, and is an increase of $4 billion over the $8 billion reported at the end of FY15.

Hopefully the figures didn’t bore you. Paul Thurrott has also taken a look behind the numbers. As always, different eyes and different brains see different things lurking in data!

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.

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