Microsoft FY23 Q3 Results Highlight Cloud Success

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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