But No New Numbers for Office 365 and Teams Users in Microsoft FY24 Q4 Results

As has become the norm, Microsoft delivered another solid set of quarterly results (FY24 Q4) on July 30. 2024. The headline number was the $36.8 billion for Microsoft Cloud, a 21% growth year-over-year equating to an extra $6.5 billion earned in FY24 Q4 compared to the same quarter the previous year. The annualized run rate for Microsoft Cloud is now $147.2 billion. The gross margin for Microsoft Cloud decreased two points to 69% but Microsoft expects it to go back up in the current quarter.

Also following its norm, Microsoft successfully obscured the numbers for segments like Teams (no updated number provided, so the official number remains at 320 million monthly active users claimed in October 2023). Teams Premium now has 3 million users, or less than 1% of the total Teams installed base. Microsoft said that the seat growth was up 400% year-over-year, proving once again that impressive growth figures are always possible from a low base.

Office 365 Numbers and Growth

Amy Hood said that Office 365 commercial seats grew 7% year-over-year, but this isn’t helpful without a base number to compare it against. The last we heard was the “over 400 million paid seats” cited in January 2024 or the 382 million number given in April 2023. Possibly the unwillingness to share precise numbers is to disguise a slowdown in new user acquisition over the last year or so. Office 365 Commercial revenue increased 13% (14% in constant currency). The same level of growth is expected to continue in Q1.

More impressively, Enterprise Mobility and Security now has 281 million paid seats. That’s an increase of 13 million over two quarters. Another number is that Power Platform now has 48 million monthly active users. I assume most of these people are Office 365 users. If so, has Power Platform really reached 12% of the Office 365 base? I guess it’s possible and Microsoft is certainly doing all that it can to encourage more use, such as retiring the Office 365 connectors in favor of workflows.

GitHub Everywhere

The Transcript of the call with market analysts illustrates Microsoft’s intention to discuss Copilot and AI at every opportunity and the continued fascination in the market about whether the huge investment in datacenter capacity will ever generate a return. CFO Amy Hood said that Microsoft spent $19 billion on capital expenditure during the quarter, almost all of it related to Cloud and AI. The spend breaks down roughly 50/50 between infrastructure and servers. In a response to a later question, Satya Nadella said that “the kit” for a datacenter represented about 60% of the total spend. Either way, Microsoft is spending heavily to support Cloud and AI.

Microsoft reported that the number of customers using Copilot for Microsoft 365 grew 60% quarter over quarter. Microsoft also said that the number of customers with over 10,000 Copilot for Microsoft 365 seats doubled quarter over quarter. However, in neither case did they give a firm number, preferring instead to mention some marquee names, such as the decision by EY to deploy Copilot for Microsoft 365 to 150,000 seats.

Given the huge marketing effort by Microsoft to push Copilot for Microsoft 365, it’s unsurprising to see substantial customer interest in the product. Everyone is curious about how generative AI can help people do their job smarter and better, so many tests are ongoing. One thing I hear time after time is the difficulty of measuring saved time or better outcomes, plus how to assess if people use saved time in a productive manner. After all, being able to save five minutes to draft and send an email isn’t much good if the time saved is devoted to non-essential tasks.

Satya Nadella said that GitHub Copilot used by more than 77,000 organizations (up 180% year over year). GitHub Copilot now represents 40% of GitHub Revenue. By itself, GitHub Copilot is larger in revenue terms than the entire GitHub was when Microsoft bought it. I don’t think this is surprising. I use GitHub Copilot with Microsoft 365 PowerShell every day and consider it to be an absolute bargain for what it delivers. Even though it is capable of creating some odd code, GitHub Copilot is a great example of how AI can be very effective when given limited goals.

New Fiscal Year, Continued Growth

It seems clear that the Microsoft Cloud will continue to grow revenue during Microsoft’s 2025 fiscal year. The growth probably won’t come from vast quantities of new Office 365 users. Instead, it will come from convincing customers to upgrade to more expensive licenses (like Office 365 E3 to E5), premium licenses, and AI.

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Microsoft Cloud Revenues Increase On as Office 365 Users Reach 382 Million Paid Seats

On April 25, Microsoft released their FY23 Q3 results and reported some interesting news. The highlight is the continued growth in Microsoft Cloud revenues to $28.5 billion, an annualized run rate of $114 billion, By comparison, the equivalent quarterly result was $17.4 billion for FY21 and $23.4 billion in FY22. The steady growth (22% year over year) in cloud revenues happened despite some bleak employment headwinds that some commentators thought would blunt progress for products like Office 365. The two-point increase in Microsoft Cloud gross margin to 72% is an indication of how profitable (and critical) this business now is to Microsoft.

The more interesting data for Microsoft results is often found in the transcript from the meeting with market analysts. It’s worth a read.

Office 365 Results

In February, I calculated that Office 365 represents about 47% of Microsoft Cloud revenues. Office 365 is still growing, albeit at a slower rate. Microsoft reported that paid Office 365 commercial seats grew 11% year over year to 382 million (up from 345 million in FY22 Q3, or an increase of 37 million in a year). To take two previous data points, in January 2023, the reported growth rate for Office 365 was 12% while in October 2021, it was 15%. Office 365 has added about 3 million (or thereabouts) new seats for as long as I have tracked these numbers and it’s impressive to see that growth continue.

Paid seats aren’t the same as monthly active seats or daily active seats. Microsoft hasn’t given a number for active seats for several years. Usually, that number is a few points behind paid seats to account for deployments paid for but not yet complete.

In terms of revenue, Microsoft said that “Office 365 commercial revenue increased 14% and 18% in constant currency, slightly better than expected with the strong renewal execution mentioned earlier and E5 momentum.” They also reported that the expansion of the installed base happened across all workloads and customer segments and that they expect average revenue per user (ARPU) growth to continue into Q4. In other words, Microsoft is succeeding in selling higher-end Office 365 licenses and add-ons like Teams Premium and Syntex-SharePoint Advanced management to their installed base.

Teams Reaches 300 Million Users

Speaking of Teams, Microsoft provided an updated number for Teams. Now at 300 million monthly active users, Teams gained 20 million over the 280 million reported in January 2023. Microsoft also said that 60% of Teams enterprise customers buy Teams Phone, Teams Rooms devices, or Teams Premium. The assertion is almost meaningless because we don’t know how many enterprise customers exist for Teams.

Interestingly, on April 24, the Financial Times reported that Microsoft has agreed to stop bundling Teams with Office in an attempt to avoid a formal European Union anti-trust investigation following a 2020 complaint from Slack. Whether this will stop the growth in Teams users tracking the growth in Office 365 users remains to be seen.

Other Interesting Numbers

Microsoft reported that revenues from Azure and other cloud services grew 27%. They didn’t break out numbers for individual services.

The installed base for Enterprise Mobility and Security (EMS) grew 15% and is now nearly 250 million seats (an increase of 32 million over the last year). These seats all have access to Azure AD Premium licenses, so have no excuse for not embracing multi-factor authentication and increasing the overall percentage for MFA-protected accounts above its current sorry level.

Potential Copilot Pricing

As you might expect, artificial intelligence and the slew of Copilot-branded products were top of mind for the Microsoft executives. Satya Nadella responded to a question about “Copilot monetization” and whether Microsoft can uplift prices above current levels (basically, can they charge more for something like Copilot for Microsoft 365).

Nadella responded by saying “The CoPilot that’s priced, and it is there, is GitHub Copilot. That’s a good example of incrementally how we monetize the price lists out there, and others are to be priced, because we are in preview mode. But you can expect us to do what we’ve done with GitHub Copilot pretty much across the board.”

Today, GitHub Copilot is available in personal and business versions. Microsoft charges $19/month for a business subscription. Nadella’s response indicates that Microsoft is likely to charge for Copilot through an add-on license, perhaps using the model established by the Syntex-SharePoint Advanced management license, which can be added to any SharePoint plan, meaning that Copilot for Microsoft 365 could be added to any Office 365 or Microsoft 365 plan rather than be included in the base functionality covered by Office 365 E5 or another SKU.

Pricing tends to be one of the last things decided for a product, so we probably won’t have final details until much later in 2023.

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Teams User Numbers Slow as Office 365 Grows 12%

One thing that’s obvious from the Microsoft FY23 Q2 results released on January 24 is that the woes of the wider economy is affecting the growth of the Microsoft Cloud. This is despite headline growth to achieve $27.1 billion in quarterly revenue ($108.4 billion annualized run rate), up 22% year over year (or 29% in constant currency, reflecting the recent strength of the dollar). However, Microsoft had “slower than expected growth in new business” in Office 365 and EMS.

Revenue for Office 365 commercial increased 11% YoY (18% in constant currency). Microsoft said that this reflected “healthy renewal execution” and growth in annual revenue per user (ARPU) because “E5 momentum remains strong.” A cynic might say that Microsoft is now sweating its massive installed base. Customers have no real choice but to renew as the costs and technical difficulties involved in getting off Office 365 are massive. Microsoft drives ARPU by making sure that new features appear in the high-end SKUs. For example, if you want any automation for compliance or security functionality, you need an E5 SKU.

Driving users to buy E5 to get better security functionality is one reason why Microsoft was able to announce that its security business surpassed $20 billion (annually) in revenue. The security business includes products commonly used with Office 365 like Microsoft Purview, Microsoft Entra (think Azure AD), Microsoft Sentinel, Microsoft Intune, and Microsoft Defender. Some of these capabilities are bundled with Office 365 E3, but high-end Purview security and compliance functionality like adaptive scopes or automatic label policies or Defender Plan 2 require Office 365 E5. And Azure AD Premium P1 and P2 licenses are needed for features like conditional access policies and privileged identity management.

Office 365 User Base Approaches 400 Million

Probably deliberately to obfuscate comparisons, Microsoft hasn’t given a firm number for Office 365 active users since October 2019 when they reported 200 million monthly active users. Since then, they’ve focused on reporting growth percentages and paid seats, like the 345 million paid seats highlighted in April 2022. This time round, they said that Office 365 commercial seats grew 12% YoY and observed that small-to-medium business and frontline worker offerings drove the growth. Microsoft also said that they “saw some impact from the slowdown in growth of new business” and that they expect revenue growth to be lower in the coming quarter by about one percentage point.

During the analyst Q&A, Brad Reback from Stifel put forward a 400 million seat number for Office 365 and asked if Microsoft would concentrate on growth in seats or ARPU. In his response, CEO Satya Nadella acknowledged “moderating seat growth” balanced by increased ARPU due to more customers taking up E5 licenses. Nadella also points to Teams Premium (referred to as Team Pro in the transcript) as an opportunity for increased ARPU.

I think the number of paid Office 365 seats is a tad below 400 million (maybe around 385 million) but it’s hard to know. The number of actual real-live human beings who use Office 365 daily is lower at maybe 360 million. Either way, it’s a big number of users that is still growing albeit slower than before.

Teams User Number Reaches 280 Million

Speaking of Teams Premium, Microsoft gave an updated number for the user base that they can sell the new product to when Teams Premium becomes generally available in February 2023. A year ago, Microsoft said that Teams had 270 million monthly active users. Now the Teams user number is 280 million (Figure 1).

Microsoft claimed that the 3.57% growth in the Teams user number represented “durable momentum since the pandemic.” It’s curious that Teams grew at about a third of the rate of increase in Office 365 seats (12% YoY). Perhaps this is because those who want to use Teams are using it and relatively few in the small-to-medium and frontline segments where Microsoft says the Office 365 growth came from need Teams.

Microsoft usually throws out some gee-whiz statistics about Teams to help people in games of Office 365 trivial pursuit. This time round, we learned that there are more than 500,000 active Teams Rooms devices (up 70% YoY) and the number of customers with more than 1,000 Teams rooms doubled YoY. This might mean that two customers now have more than 1,000 Teams rooms instead of one last year. Microsoft didn’t clarify the point. However, they did assert that Teams Phone continues to grow its share and is now the market leader for cloud calling. Over 5 million Teams users with licenses for PSTN calling joined the Teams user mix over the last 12 months.

Balance Between New Seats and More Money Per Seat

It’s hard to grow big numbers. Microsoft continues to add seats to Office 365, but it seems like the new seats have low-end licenses, which is why they need to sell more high-end add-ons or more expensive licenses to the installed base to offset the relative lack of revenue fgenrom the new seats. Growth in Teams users is slowing, but the same aspects are visible in selling add-ons (like PSTN) and hoping that customers like what they see in Teams Premium enough to cough up the extra $10/user/month for licenses. You’ve got to keep that quarterly revenue number growing…

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