Microsoft's latest earnings release shows that the firm is making solid progress moving from traditional on-premises software solutions to cloud-based services. And that's good news, as a solid 60 percent of Microsoft's earnings is still derived directly from businesses.
As we reported Thursday, Microsoft late last week announced a quarterly profit of $5.2 billion on revenues of $18.5 billion. Profits were up 16 percent, and revenues were up 17 percent, year-over-year, and Microsoft's results were much better than expected. (You might also want to check out "Short Takes: October 25, 2013, Microsoft Earnings Special Edition" for a closer look at Microsoft's earnings.)
Looked at from a high level, a few trends emerged from the earnings report.
First, although it's convenient to lump the services part of Microsoft's new "devices and services" alignment squarely in with business sales—and devices with consumers—the firm is far more diverse than that. Its Surface tablets and Windows Phone divisions straddle the line between consumers and businesses, for example, and Microsoft specifically highlighted that the consumer version of(a key online service) surpassed two million customers in the quarter, double the amount from May. Office 365—which, again, offers both consumer and business offerings—is now $1.5 billion business.
And that diversity pays big dividends (in this case, perhaps, literally). Though client Windows continues to struggle along with the rest of the PC industry, Microsoft has two bigger businesses—Office and Server—that more than pick up the slack. Windows, broadly believed to be the core of Microsoft's business, is in fact just its third biggest business. So this diversity helps Microsoft weather slowdowns like that plaguing the PC industry.
That diversity can also help Microsoft buy time for its struggling device products, like Surface and Windows Phone. The latest-generation devices in each platform have been very positively reviewed, though, and this could prove to be a breakout quarter for both. And Nokia—which Microsoft intends to purchase by early 2014—is widely expected to soon announce record-breaking Windows Phone handset sales.
Finally, Microsoft's cloud services are doing quite well, and that's partially because the firm offers such a cohesive upgrade path to major platforms like Windows Azure and Office 365. With rival cloud services from Google and others, businesses are forced to start over or perform difficult migrations. But Microsoft offers businesses seamless transitions, both to full-blown cloud service offerings and to hybrid systems that incorporate both on-premises and cloud-based infrastructure. This is a unique strength for Microsoft, and it's reflected in the fact that the firm's commercial cloud revenues leaped 103 percent, year-over-year, in the quarter.
Of course, everything that is happening at Microsoft right now will be seen through the lens of its CEO search until a candidate is picked. And according to multiple sources at the firm, many product teams are essentially stuck in a kind of limbo until that decision is made, with only those which had been prepping late-2013 releases still moving forward. It's unclear when the CEO search will conclude, and which direction that new CEO will champion.