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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$22.1 Billion Revenues in FY22 Q2 Results

Microsoft closed out their FY22 Q2 results with revenue of $51.7 billion. Of this, Microsoft Cloud (mainly Office 365, Azure, Dynamics 365, and LinkedIn) accounted for $22.1 billion, up 32% year over year. It’s a very healthy outcome which underlines the importance of cloud services to Microsoft.

In remarks to analysts, CFO Amy Hood attributed the growth to “large, long-term Azure contracts, as well as increased usage of Teams and our advanced security and identity offerings.” She noted that the gross margin for Microsoft Cloud decreased slightly year-over-year to 70%. However, after excluding the impact from a change in how datacenter assets like servers and network controllers are accounted for over their useful life, she said that Microsoft Cloud gross margins increased by roughly 3%.

Office 365 Revenue and Numbers

In terms of Office 365, Microsoft failed to give specific user numbers for either active or paid seats. They said that Office 365 commercial revenue grew by 19% and cited higher average revenue per user (ARPU) and installed base expansion as driving factors. Microsoft noted that customer movement to higher-based plans such as Office 365 E5 to access better security (Microsoft Defender for Office 365 Plan 2), compliance (many features from auto-label policies to trainable classifier), and voice (calling plans, etc.) drove “continued momentum.” The increases in Office 365 and Microsoft 365 monthly subscriptions from March 1, 2022 will give another boost to cloud revenues.

Microsoft said that “paid Office 365 commercial seats increased 16% year-over-year.” In their Q3 FY21 results, Microsoft said that they had “nearly 300 million” paid seats. Nine months later, that number is probably around 330 million. However, that doesn’t mean that this is the number of monthly active users, with or without paid licenses. It could be that Microsoft has sold licenses that are not yet used but are still counted.

Interestingly, Microsoft said that growth was “driven by another strong quarter of growth in our small and medium business and frontline worker offerings. Later, in a response to an analyst question, Amy Hood noted that growth in SME tenants and those buying services for frontline workers “often come(s) at lower revenue per month than we would see in our enterprise businesses buying the full suite of products.” In other words, Microsoft can’t generate a high ARPU from SME customers.

Teams

In July 2021, Microsoft claimed 250 million monthly active users for Teams. At the time, I wondered if the number was believable. Now Microsoft has increased the figure to 270 million (Figure 2), a small percentage increase compared to recent large spurts in growth. The same doubts exist simply because Microsoft doesn’t give sufficient detail to understand how such a large percentage of the Office 365 base uses Teams. For instance, how many Teams users are in education versus enterprise? How many people use Teams consumer, even after the roll-out of chat interconnectivity between the consumer and enterprise versions? How many of the users logged as active are there because Windows 11 loads the Teams consumer client or Office loads the Teams enterprise client (both easy to turn off).

Instead of hard data, we get snippets designed for quotations, such as learning that Teams is “at the center of this digital fabric,” or that “over 90 percent of Fortune 500 companies used Teams Phone this quarter” (maybe they like the unlimited dial-in capabilities and Teams Phone plans). Or even that Walmart chose Teams for their “more than 2 million frontline users” (surely a Teams Walkie-Talkie case study in the making…). Huge customers like Walmart underpin the credibility of the Teams user number, while also underlining the point about lower profitability from frontline worker contracts (you can bet that Walmart got a good deal).

Viva

Microsoft launched Viva almost a year ago and rolled out Viva Insights, Viva Connections, Viva Learning, and Viva Topics since. Of all the offerings, I think Viva Topics has the most interesting technology. Microsoft has also rebranded MyAnalytics to bring it under the Viva brand, which is why Outlook and OWA now have the Viva Insights add-in.

Given the hype surrounding the launch and the importance of the “employee experience category” emphasized to the Microsoft sales force and partners, it was striking how little mention it received in the results briefing. Satya Nadella said that “Viva is being used by more than 1,000 paid customers… to help address challenges like employee burnout and retention.”

With the size of the Office 365 customer base and the emphasis on Teams as the delivery vehicle for Viva, I’m surprised that this number is so low. In July 2021, Microsoft said that 124 organizations had more than 100,000 Teams users and 3,000 organizations had more than 10,000 Teams users. You’d imagine that these organizations would be prime candidates for Viva. Perhaps the U.S.-centric approach often seen in Viva is an inhibiting factor for deployment in the rest of the world?

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