Microsoft's 'commercial cloud' services gain steam

Microsoft is closing in on its $20 billion commercial cloud annual run rate goal, hitting the $18.9 billion milestone for its latest fiscal quarter.
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft's goal of reaching an annualized commercial cloud run rate of $20 billion by the end of its fiscal 2018 is looking not just doable, but almost impossible to miss.

Yes, the biggest contributor to Microsoft's $23 billion in for the fourth quarter and its $90 billion for fiscal 2017 remained its More Personal Computing division (Windows, devices, and gaming). But More Personal Computing contributed the least of Microsoft's three business units -- both for the quarter and the fiscal year -- in operating income. This transition basically is what Wall Street is hoping and expecting to see.

Credit: Microsoft

As of the end of the company's fourth quarter of fiscal 2017 (ending June 30, 2017), Microsoft was at an $18.9 billion commercial cloud run rate, officials said. That was up from $15.2 billion last quarter. Microsoft set the $20 billion commercial cloud run rate goal for itself in April 2015. And its commercial cloud gross margin percentage rate is at 52 percent, officials said, up 10 percent year-over-year -- another number company watchers are liking.

It's a good time to review what is included in Microsoft's commercial cloud category and how those services are doing.

The main services that are in commercial cloud are Azure; Office 365 business services (Exchange Online, SharePoint Online, Skype for Business Online, Microsoft Teams); Dynamics 365; and its Enterprise Mobility + Security Suite (EMS).

Updated: The Office 365 and Enterprise Mobility + Security pieces of the recently announced Microsoft 365 bundles will be included in commercial cloud; the Windows component of Microsoft 365 will not be counted in commercial cloud. Plus no on-premises server, cloud hosting or other consulting services are in this bucket, nor are any LinkedIn services (which are included in the Intelligent Cloud services line item), a company spokesperson confirmed.

For those wondering, this means Azure Stack, Microsoft's Azure-as-an-appliance turnkey offering, will not be counted as part of commercial cloud once it is generally available starting this September, officials told me this week.

Commercial cloud is not synonymous with Microsoft's "Intelligent Cloud" business segment, just to make things extra confusing, since Office 365 falls in the Productivity and Business Processes bucket, and a number of on-premises server products, like Windows Server, SQL Server, and System Center are on-premises products that are not counted as part of commercial cloud.

Microsoft officials still are not breaking out Azure sales or numbers of customers. Azure revenues were up 97 percent year-over-year this quarter, officials said, but there's no way to calculate a precise number because we don't know the base. Dynamics 365 revenues were up 74 percent year-over-year, but, again, there's no base number to use to calculate what that actually means. (The majority of Microsoft's overall Dynamics CRM and ERP users are still using the on-premises versions of those products.)

Most company watchers continue to believe the lion's share of Microsoft's commercial cloud number is coming from Office 365 Commercial. Office 365 Commercial seats were up 31 percent compared to the year-ago quarter, officials said (without providing a base number). Office 365 Commercial active monthly users hit 100 million in April 2017, according to Microsoft.

Microsoft CFO Amy Hood said on the analysts call on July 20 that for the first time this quarter, Microsoft generated more revenue from Office 365 Commercial subscriptions than Office sold via non-subscription licensing. Office 365 consumer subscribers are now at 27 million, up slightly from 26.2 million in Q3 FY17.

A few Windows and devices numbers worth noting: Surface revenues were down two percent, to $948 million, for the fourth quarter "due to product lifecycle transitions," Microsoft officials said. Even though Microsoft did launch two new Surface product lines (Surface Pro and Surface Laptop) during the fourth quarter, both came late in the quarter. Surface revenues were down in Q3 FY17, as well, and lower than Microsoft projected for that quarter.

Microsoft basically had no phone revenues in Q3 or Q4 of FY17, but the balance sheet still shows declines because the company still was in the consumer phone market for the comparable quarters a year ago.

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