Microsoft Looks to the Cloud as Phone and PC Businesses Drag
Cloud-based and digital transformation-related services are making strong contributions to Microsoft's bottom line, while its PC sales have proven to be a drag and Windows Phone revenues are crashing, the company reported yesterday.
Microsoft's financial results for the third quarter of its 2015-2016 fiscal year showed the company with revenues of $20.5 billion, a six-percent decline over earnings in the same quarter last year. Those figures included a deferral of more than $1.5 billion in revenues related mostly to the July release of the new Windows 10 operating system, which represents a new model for how the company will distribute and update its flagship software.
The Azure cloud platform has continued to be an especially bright spot in Microsoft's business, with triple-digit increases in revenues in the third quarter. Other growth areas include advanced computing offerings such as the Cortana Intelligence Suite and the Internet of Things market.
Digital Transformation a 'No. 1 Priority'
During yesterday's earnings call, CEO Satya Nadella (pictured above) said that Microsoft had a "solid quarter" in the most recent reporting period, with the commercial cloud business halfway to its fiscal year 2018 revenue goal of $20 billion. A growing number of enterprises continue to adopt cloud-based solutions as part of their digital transformation efforts, according to COO Kevin Turner.
"Digital transformation is the number one priority on our customers' agenda," Turner said in a statement. "Companies from large established businesses to emerging startups are turning to our cloud solutions to help them move faster and generate new revenue."
Microsoft reported that during the third quarter 270 million monthly active devices were running the new Windows 10 operating system. That's twice the rate of adoption the company saw in the same time period with the release of Windows 7, Nadella said. He added that the company expected to see that number continue to grow as more enterprises deploy the updated OS on their systems.
Surface Sales an Exception
The number of Microsoft's Commercial Office 365 customers rose by 57 percent in the third quarter to pass 70 million monthly active users, Nadella said.
The company is also "expanding into new markets, such as security, analytics, and cloud voice, where we see an opportunity and where we can differentiate," Nadella said. Meanwhile, Office 365 is becoming a growing platform for developers, as are other parts of the business such as Skype, he said.
The company's personal computing and mobile phone businesses are lagging behind, although Surface tablet sales were an exception, with revenues from the Surface Pro 4 and Surface Book rising by 61 percent.
Executive vice president and CFO Amy Hood said the company had expected device revenues to decline during the third quarter, and they did drop by 11 percent. A large part of that decline was due to a 46 percent decline in sales of Windows Phones, and the company ended the quarter with a "relatively high" inventory of unsold Lumia devices on its hands, Hood said.
Windows Phone currently has a 2.54 percent share of the global mobile and tablet operating system market, according to March data from the Web and mobile analytics firm Net Applications. Android is the mobile OS leader with nearly 61 percent of the market, followed by Apple's iOS with close to 32 percent.
Image Credit: Microsoft.