Microsoft is (finally) winning with Windows 10 and the Cloud

Microsoft CEO Satya Nadella speaks at the presentation of the new Microsoft cloud strategy at the Microsoft Germany branch in Berlin, Germany, 11 November 2015.

Image: Gregor Fischer, dpa, Corbis

By Lance Ulanoff2016-01-29 17:45:15 UTC

Microsoft ^[1], at long last, is learning.

That's a key takeaway from Microsoft's largely positive 2016 Q2 results. Released on Thursday, the numbers are a reflection of the company's performance during the last holiday season.

What we learned is that Microsoft knows how to strengthen its business to make up for weak spots. Despite a declining PC business, a 49% decline in Windows mobile revenue and a near complete lack of color on Xbox One console sales, analysts and observers are essentially thrilled with the company's results.

Why? The answer is, at least partly, in the cloud.

Microsoft CEO Satya Nadella told investors that the company has nearly doubled its cloud customers over the past 12 months. The company saw huge gains in its Azure business (an able competitor to Amazon's Web Services). Azure revenue grew 140%.

"Our commercial cloud run rate surpassed $9.4 billion dollars, up over 70% year-over-year and almost halfway to our goal of $20 billion," said Nadella.

"I like that [Microsoft's] Azure is giving Amazon a run for its money. Right now, as it relates to big businesses, it's a two-horse race," said Patrick Moorhead, President and Principle Analyst for Moor Insights and Strategy.

Investors love when the business side of a big business grows like that.

They also found much to cheer in Windows. Nadella reported that more than 200 million users are now running Windows 10.

"Adoption is nearly 140% faster than Windows 7," said Nadella in the earnings call.

And even as the PC business continues to decline, the bleeding has been largely staunched. Windows OEM business fell by 13% in late 2014. The latest earnings put the decline at 5% (at the end of 2015).

"The Windows 10 buy-in is important and will help keep the PC sales only decline about 2-3% this year vs 10% last year. That is good for Microsoft and their PC partners," said Creative Strategies President and long-time Microsoft watcher Tim Bajarin.

Looks good on the Surface

Microsoft's Surface bet also continues to pay off as the company reported a 29% increase in revenue that they say is driven by the dual launch of the Surface Pro 4 ^[2] and the hybrid Surface Book ^[3].

"This was the best quarter for Surface ever with over $1.3 billion in sales," said Nadella.

Microsoft is "gaining solid acceptance with their own Surface brands and I see Microsoft staying in the hardware business to drive innovation on the Windows platform from now on. This is becoming an important strategic product for them," said Bajarin.

Hanging up

Windows Phone continued its spectacular fall — a 49% revenue decrease — but it's such old news that during the call, no analysts asked about it.

The company is reportedly rebranding ^[4] its handheld efforts, putting them under the increasingly popular "Surface" brand, a move that some believe could help resurrect the Microsoft handset business.

"We haven't seen yet what the Surface team has in store, which I believe will be a much better Windows phone than anyone has seen," said Moorhead, though he added that Microsoft's phone efforts will be on a very short leash. "How many times do they have to get it right? Surface didn't really hit their stride until Surface Pro 3, three generations later. Surface phone wouldn't have three chances. They need to get it right the first time," said Moorhead.

Microsoft's also being buoyed by the continued strong response to its Office subscription business. The company now has 20 million Office subscribers (all of which use that popular Microsoft cloud). More interesting, though, is Microsoft's effective multi-platform strategy.

"On iOS and Android, Skype has more than 900 million downloads and Office apps surpassed 340 million this quarter. There are also 30 million iOS and Android active devices running Outlook," said Nadella.

What doesn't matter

Microsoft reported an all-time-high 48 million Xbox Live subscribers, but offered no information about Xbox One ^[5] units sold.

Last year at this time, the company reported 6.6 million Xbox units sold and last October the company was crowing about outselling ^[6] Sony's PlayStation 4. During the call, however, Microsoft CFO Amy E. Hood noted an Xbox hardware revenue decrease, but pinned it on declining Xbox 360 sales.

Not that this apparently mattered to investors, as not a single one questioned the Xbox hardware numbers during the earnings call.

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