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Microsoft Revenue Restated Part Two:  Cloud Detail

|About: Microsoft Corporation (MSFT), Includes: AMZN
Summary

Microsoft disclosed actual Commercial Cloud revenues in May 2017 and August 2017.

Specific disclosures for Azure mix and Office 365 commercial provide enough detail to accurately track Azure IaaS for the first time.

Growth rates for Azure and other cloud properties provide sufficient context to believe these estimates are materially accurate.

Microsoft (MSFT) held a conference call in August to outline the impact of early adoption revenue recognition rule 606.  This blog post is part 2 and will look primarily at what Microsoft discloses as Cloud related revenues.

The revised table shows how the revenues look under the new Accounting Standard 606 recognition rules.  Microsoft will be reporting both methods for a period to help users understand the transition. 

Billions

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Prod/Bus

$6.00

$6.48

$6.21

$7.11

$6.44

$7.18

$7.71

$8.55

Int Cloud

  5.58

  6.26

  5.92

  7.18

  6.10

  6.76

 6.73

 7.82

PersComp

  9.33

 12.51

  9.39

  9.18

  9.39

11.89

 8.77

 9.23

Revised

$20.91

$25.25

$21.52

$23.47

$21.93

$25.83

$23.21

$25.60  


What wasn’t impacted by adoption of new revenue standards?

  • Revenue for Cloud services, any hardware, enterprise services and advertising

Cloud revenue disclosure overview

  1. The adoption of standard 606 did not impact prior disclosures related to the cloud.
  2. Microsoft has historically chosen to focus investor attention of the annualized run rate for the Commercial Cloud.  This run rate, based upon the last month of each reporting period is shown per the following chart.

The Commercial Cloud includes Azure, Office 365 Commercial, Dynamics 365, Dynamics online CRM and other cloud services.  Azure is included in the Intelligent Cloud segment.  The other revenues are included in Productivity and Business Processes.

During the May 2017 Analyst Briefing Microsoft disclosed actual commercial cloud revenues for the first time.  The actual revenues were provided for fiscal 2015 and 2016 (1:19 mark of video).  Fiscal 2017 was estimated and confirmed during this August 2017 presentation.

  1. Fiscal 2015 revenue $5.8 billion
  2. Fiscal 2016 revenue $9.5 billion up 64% YY
  3. Fiscal 2017 revenue $14.9 billion up 55% YY

Intelligent Cloud

The reporting segment includes:

  • Enterprise Services
  • Server Products and Cloud Services (includes Azure)

Azure                                                                                           

The Microsoft segment description in their fiscal 2017 10k:  Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business.  This includes Azure but not the hosted productivity products Office 365 commercial or Dynamics 365 which are reported in the Productivity and Business Processes segment.

During Amy Hood’s presentation in May (1:16 mark of video), she provided a pie chart provided the portion of reported Server and Cloud service revenues that came from Azure in fiscal 2015 and estimated for 2018.  My estimate of this pie segment is 4% for FY 2015 and 28% for FY 2018.

The growth rate of Azure and these product groups has frequently been provided on earnings conference calls, which can be found on the Microsoft Investor Relations website.  Based upon these quarterly updates Azure revenues have been estimated as follows:

Dollars in Billions

Fiscal years

Q1

Q2

Q3

Q4

FY

2014

$0.07

$0.08

$0.10

$0.10

$0.35

2015

$0.15

$0.17

$0.20

$0.23

$0.75

2016

$0.34

$0.39

$0.42

$0.45

$1.61

2017

$0.74

$0.75

$0.81

$0.90

$3.20

YY growth rates most disclosed by Microsoft on earnings calls

Q1

Q2

Q3

Q4

FY

2015

121%

115%

100%

125%

115%

2016

121%

127%

110%

102%

114%

2017

116%

93%

93%

97%

99%

On the fiscal 2017 base of $3.2 billion, Azure is likely to grow 90% to 100% to surpass $6.3 billion.  That would approximate the 28% mix referenced during the May 2017 meeting.

Based upon the above for Azure and the portion of Amazon (AMZN) AWS that Synergy Research categorizes as IaaS, the following chart shows the comparative trended calendar quarterly revenues.  The chart clearly shows that AWS remains the dominant Cloud platform and that both are gaining market share at the expense of other providers.


Productivity and Business Processes

Microsoft described this segment in their 10k as follows:

Our Productivity and Business Processes segment, consists of products and services spanning a variety of devices and platforms. 

Office Commercial

  • Office 365 subs
  • Office license on-premises
  • Comprising Office, exchange, SharePoint, Skype for business, Teams and related Client Access Licenses

Office Consumer

  • Office 365 subs
  • Office licensed on-premises                              
  • Office consumer services including Skype, Outlook.com and OneDrive

LinkedIn including Talent solutions, marketing solutions and premium subscriptions

Dynamics

  • Dynamics ERP on-premises
  • Dynamics CRM on premises
  • Dynamics 365

The commercial cloud includes Office 365 commercial, Dynamics 365 and other cloud properties.  These other cloud properties likely include Dynamics online and various collaboration online or 365 add-ons such as Exchange, SharePoint, Advanced Threat Protection and Teams.

Quarterly Cloud Revenue

The quarterly cloud revenue in the Productivity and Business Processes segment are not split out by product.  The disclosures provided by Microsoft provide enough information to estimate but the split is still being analyzed. A couple of specific disclosures worth noting are:

  • Microsoft has annuity and on-premises revenue for certain products such as Exchange and SharePoint.  The on-premises portion is declining as more companies are transitioning to the cloud.  The annuity portion of products such as Dynamics CRM online is either declining or slowing as more of these capabilities are being included as updates to Office 365 commercial or Dynamics 365. 
  • Office 365 commercial reached a run rate of $2.5 billion at the end of March 2015 per Microsoft earnings call. That disclosure would mean Office 365 commercial revenue for the month of March 2015 was over $208 million.
  • Microsoft disclosed that Office 365 commercial quarterly revenue surpassed that of Office commercial traditional revenues for the first time for June 2017.

Total SaaS revenues in the segment totaled:

Q1

Q2

Q3

Q4

FY

2014

$0.45

$0.53

$0.63

$0.91

$2.52

2015

$1.03

$1.14

$1.30

$1.58

$5.05

2016

$1.58

$1.87

$2.05

$2.43

$7.93

2017

$2.40

$2.73

$2.95

$3.47

$11.55

 FY Growth rates

Q1

Q2

Q3

Q4

FY

2015

129%

114%

107%

74%

100%

2016

54%

65%

57%

53%

57%

2017

53%

46%

44%

43%

46%

Trended Cloud Revenues excluding Azure IaaS:

Disclosure: I am/we are long MSFT.

Additional disclosure: I may go long AMZN within next 72 hours.