Microsoft ‘Partner Transition’ Eats Into SMB, Office 365, Windows Businesses

“I can’t tell you in particular which part of that was some of the partner transition work we’re doing versus macro, it certainly feels like both,” Microsoft CFO Amy Hood said on the earnings call Tuesday.

Microsoft Chief Financial Officer Amy Hood said “partner transition work” had a negative effect on growth with small and midsize business customers during the tech giant’s latest quarterly earnings, another apparent sign that partner program changes this year have not only had an impact on partners’ businesses, but business for Microsoft itself.

During an earnings call Tuesday for the Redmond, Wash.-based tech giant’s fourth fiscal quarter and full fiscal year 2022 – which ended June 30 – Hood said “moderation” in small and midsize business (SMB) deals had a negative effect on paid Office 365 commercial seats, the Enterprise Mobility + Security business and Windows commercial products and cloud services revenue.

All of those business segments still grew overall year over year, Hood said.

[RELATED: MICROSOFT EARNINGS: SLOW PARTNER PROGRAM CHANGE ADOPTION ATE INTO ON-PREMISES REVENUE]

How Did Microsoft Do In Q4?

During the question-and-answer portion of the call, Hood said that Microsoft saw “some weakness in new deals, particularly in the SMB segments” that buy licenses other than E5, a license type aimed at larger businesses.

She also credited the weakness to macroeconomic factors – including the U.S. economy, which appears headed for a recession – along with the transition from Open Licensing to Microsoft’s Cloud Solution Provider program mentioned on the company’s earnings call in April.

Licenses aimed at SMB customers are “primarily sold through partner(s), and so we need to make sure we‘ve got the best value props but got to make sure the price is right, offer’s right and make sure that we are tuning that value prop to what small business customers need today, which is great value,” Hood said on Tuesday’s call.

“We’ll keep executing that through partner(s). We’re in the middle of that transition we talked about last quarter, and we’re still working on it,” she added.

She continued: “That is a spot where you tend to see macro weakness show itself … while I can’t tell you in particular which part of that was some of the partner transition work we’re doing versus macro, it certainly feels like both. And so that’s certainly a spot that we’re watching.”

Paid Office 365 Commercial seats still grew 14 percent year over year, driven by SMBs and frontline worker offerings, Hood said on the call.

But “growth was impacted by some moderation in new deal volume outside of E5 (licenses), particularly in the small and medium business customer segment,” Hood said during the earnings call Tuesday.

The installed base for Microsoft’s Enterprise Mobility + Security platform “grew 21 percent to over 230 million seats with some impact from the small and medium business deal moderation noted earlier,” she said.

She continued: “Windows commercial products and cloud services revenue grew 6 percent and 12 percent in constant currency, lower than expected due to some impact from the small and medium business deal moderation noted earlier.”

Hood expects to see “growth moderation in our small- and medium-sized business segment” continue into the next quarter, although Microsoft’s “differentiated market position, customer demand across our solution portfolio and consistent execution across the Microsoft Cloud should drive another strong quarter of revenue and share growth” overall, she said.

Partner Program Changes In 2022

CRN has asked Microsoft if the Open Licensing to Cloud Solution Provider (CSP) program transition is related to the company’s “new commerce experience” (NCE) roll out this year that has proved controversial among partners – and whether NCE has caused some of the negative effects Hood talked about on Tuesday and in April.

Partners have spoken out against a 20 percent premium Microsoft added to monthly commitments of software packages including Microsoft 365, which was rolled out under the NCE banner earlier this year.

Partners allege that the premium punishes customers that need month-to-month commitments due to fluctuating employee counts or fear of going out of business. Partners also allege that the premium pushes customers to annual commitments – preventing customers from leaving a managed service provider (MSP) in the middle of a commitment and possibly leaving partners on the hook if a customer goes out of business or doesn’t need as many Microsoft licenses. Partners are also locked in with the distributor they used for an annual license commitment.

Microsoft partners and customers have had to buy new M365 subscriptions under NCE since March. In June, Microsoft indefinitely delayed an end date for partners to renew subscriptions bought before the NCE roll out.

Partners are now getting ready for a second major change to the partner program – the introduction of partner capability scores used to determine who is a Microsoft “solutions partner” – a replacement for Microsoft’s classic Gold and Silver partner designations – and receives certain benefits from the tech giant.

The scores go into effect in October, but partners can continue to renew legacy benefits under the outgoing Gold and Silver system even after October.

Microsoft Q4 Results

Microsoft’s revenue for the quarter ended June 30 was $51.9 billion, up 12 percent year over year. Net income was $16.7 billion, up 2 percent year over year, according to the company.

Microsoft Cloud revenue was $25 billion, up 28 percent year over year. Commercial bookings grew 25 percent, according to the company.

Revenue was hit by an unfavorable foreign exchange rate, according to the company. Production shutdowns in China that continued through May and a June “deteriorating PC market” had a negative effect on Windows original equipment manufacturer (OEM) revenue, resulting in a loss of more than $300 million for the segment, a decrease of about 2 percent year over year, according to Microsoft.

That OEM loss contributed to flat growth in Microsoft’s “more personal computing” segment, which saw revenue increase $270 million in the quarter, an increase of 2 percent year over year.

Microsoft’s “intelligent cloud” segment saw revenue increase $3.5 billion, or 20 percent year over year, due to Azure, cloud services, consumption growth and enterprise support services.

The company’s “productivity and business processes segment” revenue increased $1.9 billion, or 13 percent year over year. Drivers included LinkedIn, Dynamics 365 and Office consumer products, according to Microsoft.

Microsoft recorded operating expenses of $126 million as a result of significantly scaling down operations in Russia with the country’s ongoing war in Ukraine, according to the company.

Regardless, Microsoft stock was up 4 percent to $261.90 in after-hours trading Tuesday.

$113M In Severance Expenses

The company spent $113 million in employee severance expenses due to a “strategic realignment of our core business groups,” according to Microsoft.

Although it occurred after the quarter ended, Microsoft confirmed to CRN earlier this month that a “small number of employees” were let go due to a “strategic alignment,” but that the tech giant still plans to “grow headcount in the year ahead.”

Microsoft also recently confirmed to CRN that it has cut open jobs in its Azure, security and other business segments.