Microsoft’s promise to grow its Commercial Cloud run rate to $20 billion has come and gone. The company beat its goal, reaching the promised revenue threshold ahead of schedule.
After meeting the promise, Microsoft stopped putting new run rate results into its quarterly reports. Instead, the firm now merely gives investors a quarterly Commercial Cloud revenue sum.
But, as Microsoft chews through its vision of the future at its Build developer conference, let’s do something I’ve been meaning to do for a little bit: typing a bow on covering Microsoft’s Commercial Cloud run rate growth and moving the hell on.
Why go through the exercise? Because Microsoft’s transition from the world of pre-paid software to subscriptions has been emblematic of the software buying world’s own shift to the model. (Adobe is another good example if you’d like to do some more research.)
If SaaS, broadly, is ever going to grow into the scale that its most vocal backers expect it to, big enterprise dollars needed to leave on-premise software behind and move into subscriptions. Therefore, Microsoft winning its own $20 billion race helps us understand SaaS as a whole, and the modern software companies which came of age in the unicorn era that are still going public.
In other words, this is the other half of the SaaS boom.
Microsoft promised in mid-2015 that its Commerical Cloud—a collection of parts that Redmond put into a shared bucket—would reach an annual run rate of $20 billion by the end of the company’s fiscal 2018.
That’s the end of the second quarter, 2017, for us that live by the calendar you have on your wall.
At the time that the company made the promise, Microsoft’s Commercial Cloud had a run rate of just $6.3 billion. I noted that the goal seemed like a material stretch:
Commercial cloud at the company is currently on a $6.3 billion run rate. That figure was up $800 million, sequentially, from the preceding quarter. The end of Microsoft’s fiscal 2017 is around nine quarters from now. That number implies that Microsoft expects its commercial cloud business to grow to north of $1 billion per quarter for the next few years, a dramatic acceleration from its current pace.
Quite a lot north of $1 billion per quarter, really.
Later, in early 2016, I checked back in on the race. At that time, Microsoft had just grown its Commercial Cloud revenue from $8.2 billion in the preceding fiscal quarter to $9.4 billion. That $1.2 billion in single quarter growth was pretty damn good, putting the company on pace to reach its goal if we extrapolated from just that single quarter.
At the time, however, we reported that if you looked at its past growth from an initial $4.4 billion run rate (the earliest run rate metric for Commercial Cloud that we’ve been able to find), and took an average of its growth to-date at that point, the company was going to miss. More simply, its average growth to that point from available data was light. It’s trailing-quarter raw dollar growth, however, looked good.
If Microsoft could keep up the latter, it would beat. If it kept to the former, it would miss.
The company, as we all know, managed to find the growth levers it needed and in the first quarter of its fiscal 2018, crossed the $20 billion run rate mark for Commercial Cloud ahead of schedule. So, the acceleration that we had covered, persisted.
In its FQ1’18 earnings, Microsoft announced that its Commerical Cloud segment had reached an annual run rate of $20.4 billion. That was the last time (to date) that Microsoft disclosed a run rate metric in its earnings releases or conference call remarks.
In the next quarter, Microsoft began to share quarterly revenue figures for its Commercial Cloud performance instead. So why not just take any particular quarter’s run rate and just divide it by four? Boom, there’s your run rate.
If only it was that easy. Indeed, here’s a standard Microsoft note on how it calculates its Commercial Cloud run rate:
Commercial cloud annualized revenue run rate is calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics Online, and other cloud properties.
There goes that. Notably, when we collated the Commercial Cloud historical performance data (here) we had to dance a bit. One missing data point (FQ1’15 run rate) meant that we couldn’t calculate another (FQ1’16 percent run rate growth), and since prior run rate figures were based only on last-month figures, we couldn’t use later full-quarter Commercial Cloud revenue metrics to calculate similar run rates, among other annoyances.
But after doing our best to get the numbers in order, here is what Microsoft’s Commercial Cloud revenue and run rate growth looks like, with a mixing at the end of percent growth data which swaps from run rate to trailing revenue:
I’d love to fill in a few things that Microsoft didn’t disclose, or that we couldn’t find when combing back through old documents. But we have a pretty good picture of how one of the world’s biggest companies grew one big, varied bucket of recurring cloud revenue.
In the above, you can mostly see Microsoft’s movement revenue mix shift away from consumer hardware and Windows as the central gravity well of its corporate soul. Not that any of that should be read in the pejorative. Microsoft is just better at enterprise shit than it is at selling phones.
RIP Windows Phone, but good show, I suppose, Commercial Cloud.