Office365 tips the balance over on-prem for Microsoft's cloud ambitions

Microsoft just passed a cloud milestone as revenue from Office365 passed that coming from on-premises and desktop Office apps for the first time last quarter.

It’s a development that CEO Satya Nadella take as validation of the firm’s Intelligent Cloud mantra and long term investment:

Nothing shows up in just one quarter. We have been working on this for a long time whether it is the product and the approach we have taken from IaaS to PaaS to SaaS, even the diversity of our SaaS offerings, and also how we think about going to market. All of these have been multiple years of hard work, and clearly there is momentum across the board
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He adds:

Microsoft 365 is a fundamental shift in how we design, build and go-to-market to address customer needs. Fortune 500 customers Fed-Ex, Dow Chemical, Staples, Progressive Insurance all chose Microsoft 365. The success of our Secure Productive Enterprise offering with its triple digit seat growth is one reason we are investing in Microsoft 365 for businesses of all sizes. We continue to see strong growth of Office365 with customers like Nissan, Quicken Loans, Key Bank, Deutsche Telekom all choosing Office365.

Our commercial cloud annualized revenue run rate now exceeds $18.9 billion. This quarter’s cloud growth puts us squarely on track to reach the goal we set a little over two years ago, of $20 billion in commercial cloud ARR in fiscal 2018. More than ever before, customers are placing their trust in the Microsoft cloud.

Azure revenue is also surging, up 97% year-on-year, although no hard numbers were provided. Nadella cites the likes of AXA Global, KPMG, Dun & Bradstreet, Hearst, Walgreens, T-Mobile and Sephora as among new Azure customers:

CIOs and Business Decision Makers increasingly prefer Azure as they make decisions about their cloud strategy. They value our hybrid consistency, developer productivity, AI capabilities, and trusted approach. And we keep investing in cloud computing to create broader economic benefit and opportunity, as we’ve done with our South Africa datacenter expansion, bringing Azure to 40 regions globally - more than any other cloud provider. And as part of our commitment to trust, we are helping our customers prepare to be GDPR-compliant and meet the requirements of the European Union ahead of the enforcement deadline.

The AI bit

As is now compulsary for all enteprise software CEOs, Nadella pitchs a growing focus on AI in businsess apps:

The core currency of any business going forward will be the ability to convert their data into AI that drives competitive advantage. It all starts with having support for the comprehensive data estate spanning Azure Database, Cosmos DB, Data Warehouse, Data Lake, combined with SQL Server. Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and reliably power data-intensive applications at unprecedented scale and performance, from IoT to AI to mobile and much more.

Retailer Jet.com is using Azure Cosmos DB to process trillions of transactions every day. Customers are infusing AI into their products & services using Azure AI infrastructure and services such as Bot Framework and Cognitive Services. Sabre, a leading technology provider to the global travel industry, is piloting AI-powered solutions for travel agencies to better serve customers. And Dixons Carphone is using Azure and our Cognitive Services to boost customer engagement and provide a more consistent, seamless experience across online and in their stores.

Another point of focus is the ongoing integration of LinkedIn with the rest of the Microsoft applications estate. While the technical side of this may be proceeding apace, for the moment LinkedIn’s operating loss of $361 million is a fiscal drag, despite delivering $1.1 billion in revenue. But Nadella still prioritises the benefits of the acquisition:

We are investing in the LinkedIn flagship experience to create new value for members and customers and accelerate growth. We saw continued momentum in mobile and strong engagement across the platform, with sessions up more than 20% for the third consecutive quarter. And we continue to innovate new ways for members to maximize the value of the platform.

We launched a new messaging overlay resulting in record levels of messages sent on LinkedIn, and introduced a career advice marketplace that will let members easily tap into the professional expertise of more than 500 million members around the world. On top of that, Talent Solutions saw record level growth in confirmed hires and InMail response rates this quarter.

I’ve talked about the opportunities with Dynamics and LinkedIn. Earlier this month, we launched Microsoft Relationship Sales solution, bringing together LinkedIn Sales Navigator and Microsoft Dynamics, as well as Dynamics 365 solutions for Retail and Talent.

My take

There’s still a way to go for Azure to be generating the same kind of customer enthusiasm and third party ISV support as Amazon, but it’s undeniable that there’s cloud transition progress being made at a rapid rate of knots at Microsoft.