Microsoft released its second quarter 2015 earnings Monday, January 26, and results were what Yahoo! Finance predicted. Earnings per share registered right on the money at $0.71, with revenues totaling $27.47 billion, which came in better than the expected $27.33 billion. Even though Microsoft exceeded forecasts, some analysts are calling this a “bad quarter,” and stock prices tumbled 4 percent after the announcement.
The real story, though, is the way Microsoft earned its revenues, a telling sign that the software giant looks more and more like a products and devices company now. Let’s take a closer look at this:
The bright spots from the earnings report were revenues generated by the Microsoft Lumia mobile phone ($2.3 billion) and Surface Pro 3 ($1.1 billion). These numbers are record breakers for Windows phones and Windows tablets. As a whole, Microsoft’s Devices and Consumer Division reported revenue of $12.9 billion—that’s an 8 percent increase over last year.
But here’s why analysts say the earnings were “bad” overall for Microsoft—its commercial licensing segment, which counts revenues from software and services like Office, Office 365, Server, and Exchange, posted only $10.7 billion—that’s a drop-off of 25 percent. The company cites that sales of Windows 7 and Windows 8 fell short of previous quarters that were impacted by Windows XP end of life.
On the consumer side, the silver lining for Microsoft is that Office 365 subscribers are up 2.2 million since last quarter, ending at 9.2 million total users, a growth figure of 31 percent.
For its commercial revenues, Microsoft figures Office 365 sales into its “Commercial cloud” numbers—which also includes Azure and Dynamic CRM Online—and registered 114 percent growth over last quarter. On the other hand, sales of traditional Office dropped off 1 percent. Server software was up, and will probably continue to climb this year, with Server 2003 reaching end of life.
It is interesting what this means for Microsoft moving forward. The announcement that Windows 10 will be a free offering in its first year indicates that OEM software revenues will continue to drop off. We are interested whether this will compel the 10-12 percent of users left on Windows XP to upgrade to Windows 7 or Windows 8.1 to take advantage of the free offering.
Along with Lumia and Surface Pro 3, hardware in Microsoft’s development pipeline have sparked enough interest to watch moving forward, namely the Surface Hub conference room collaboration device, which is poised to make an impact with Windows’ primary audience, the business user. On the consumer side, the HoloLens has piqued sizable curiosity as it proceeds through development.
In any case, the face of Microsoft is changing, that much is for sure. At this point it would seem that Microsoft leadership sees the success of Windows 10 determining the success of its devices—which will determine the success of Microsoft itself.