You’d have to be a forensic accountant to understand Microsoft’s financials. However, a few things are clear from this week's second quarter earnings release.
The first is that the Redmond, Wash.-based tech giant is starting to make serious ground in the cloud space. The second is that CEO Satya Nadella’s strategy of revamping and remarketing Windows is needed more than ever. The third: there's no beating Office 365, at least for the moment.
While the numbers triggered only tepid enthusiasm from the financial markets, from an IT perspective there are a lot of positives that show Nadella’s strategy of moving Microsoft from packaged software company to cloud-based software provider is beginning to pay off.
Office Ups and Downs
The report shows the number of subscribers to the Office 365 Home and Personal editions has risen to 9.2 million, an increase to 9.2 million subscribers from 7 million subscribers in October.
That's nearly triple the number of subscribers from a year ago. That's when Microsoft reported it had 3.5 million Home and Personal subscribers, a mere 18 months after it was launched.
With Office 365 now firmly at the center of Microsoft's business strategy, this figure should keep jumping as Microsoft adds more and more functionality and outstrips Google, its nearest rival in the productivity suite space.
The news wasn’t as good for packaged Office products, which fell as Office 365 grew. Office consumer revenues were down 25 percent from the same quarter last year, as home users jumped onboard the Office 365 bus. Microsoft also started offering improved free versions of Word, PowerPoint and Excel apps for iOS and Android, which allow users to create and edit Office documents.
Are free apps a sign of charity or madness, you might ask? Neither. While Microsoft has never said as much, it's likely that this was a strategic step to keep customers from moving to Google. While Free Office apps as an Office 365 teaser is a gamble, it appears to be paying off.
Windows was also a mixed bag for Microsoft. While it didn’t perform as Microsoft might have hoped, it’s likely to improve in the coming quarters once Windows 10 comes online. It's a pretty smart strategy that will give Windows 10 a base once released.
Windows sales fell by 13 percent over the fiscal first quarter. But that was predictable after the enterprise rush towards Windows 7 and Windows 8 tapered off following Microsoft's end of support for XP.
Microsoft also started to give away Windows for free to PC and tablet makers. The result: PCs with the Windows operating system can be bought for as little as $300. It's a shrewd move under current market conditions.
With this kind of ongoing strategy, Windows is just about irresistible. It means that when Windows 10 is finally made generally available later this year as a free download for devices and PCs, there’s a ready-made Windows market.
But where’s the money? In a conference call about the earnings, Nadella explained. Speaking of Windows 10, he said:
We want people to love Windows and have made this our most collaborative project yet with more than two million insiders giving us feedback every day. I am very optimistic about Windows 10.
Pretty darn smart. Offering Windows for free creates a massive platform for apps, and with that kind of audience the platform of choice for many developers.
With both these business areas, Microsoft is playing the long game so the figures for the second quarter are almost irrelevant. According to a statement from the company, Microsoft had operating earnings of $16.3 billion on revenue of $26.5 billion, including integration charges for the Nokia purchase and restructuring. Profits were $5.86 billion down from $6.56 billion for the same quarter a year ago. Other highlights of the figures include:
- Surface revenue of $1.1 billion, up 24 percent, driven by Surface Pro 3 and accessories
- Search advertising revenue grew 23 percent, with Bing US market share at 19.7 percent, up 150 basis points over prior year
- Phone Hardware revenue of $2.3 billion, with 10.5 million Lumia units sold driven by growth in affordable smartphones