Microsoft (NASDAQ:MSFT) is betting big on Office 365.
The service, which includes the core Office software applications, along with email accounts and online storage, is a key component of its enterprise cloud offerings. Microsoft believes its commercial cloud services can achieve an annualized revenue run rate of $20 billion by its 2018 fiscal year, up from just $12 billion today. To get there, Microsoft will need demand for Office 365 to keep growing.
In an effort to drive additional sales, the Windows maker continues to release new Office 365 features and applications. The company introduced three within the last quarter that should aid Office 365's growth.
Planner, Skype Meetings, and Advanced Security Management
In June, Microsoft added Advanced Security Management and Planner to Office 365. In July, it introduced Skype Meetings. At an individual level, none of these offerings is likely to create a significant number of new Office 365 subscribers. Yet they collectively embody the steps Microsoft is taking to enhance the Office 365 service.
Planner is a new Office 365 application aimed at enterprise and education users. As its name implies, it's intended to "introduce a new and improved way for businesses, schools and organizations to structure teamwork easily and get more done." Users can establish teams and assign tasks, then easily track progress and communicate in a straightforward fashion. Its appeal is easy to understand: Organizations and institutions that wish to use the application must subscribe to Office 365; those that already do may find that Planner enhances the service's value, and remain loyal customers.
Advanced Security Management is similar, albeit much more of a niche offering. Reserved for Office 365 E5 customers, Advanced Security Management brings a new level of security to enterprise IT departments, allowing them to detect threats and monitor the activity of employees. Microsoft sells several different Office 365 tiers. E5 is the most expensive, at $35 per user per month. The addition of Advanced Security Management should make that tier more appealing, and help generate additional revenue.
Finally, Skype Meetings isn't part of Office 365, yet it could still drive additional users to the service. Most Office 365 subscription packages include HD video conferencing with Skype. Skype Meetings is a free service that breaks out some of those features and offers them to enterprise users that do not currently subscribe to Office 365. If they find Skype Meetings compelling, they may choose to subscribe to Office 365 for the complete experience.
Office 365's growth remains strong
Last quarter, Office 365 Commercial seats grew 45% on an annual basis, while revenue rose 59% in constant currency. Meanwhile, about 70% of Microsoft's renewing Office enterprise customers are now opting for Office 365 instead of its traditional Office software. The number of Microsoft's partners that sell Office 365 rose 25% on an annual basis. Overall, Microsoft's Productivity and Business Processes segment (which includes Office) saw its revenue rise 5% on an annual basis last quarter, driven by the growth of Office 365.
Microsoft's management believes Office 365 demand will remain strong, and that some users will opt for its more expensive offerings over time. "...we are very excited about E5," said CEO Satya Nadella on Microsoft's most recent earnings call. "but [it is in the] very, very early days of E5...so E3, E5, and higher penetration...is what [will] drive ASP growth."
Although Windows 10 has fallen short of Microsoft's targets, demand for its cloud services remains on track. As Microsoft continues to make Office 365 more enticing, it should be able to achieve its cloud target.