5 Things Microsoft Corporation's Management Wants You to Know

By Markets Fool.com

Since Monday, shares of Microsoft have lost more than 11% of their value. Although the tech giant reported earnings that were largely in line with analyst estimates, the company's Windows business showed signs of weakness.

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In its subsequent earnings call, Microsoft's management offered an explanation for the disappointing performance, and gave investors a few key points to keep in mind. Below are five of the most important quotes from Microsoft's recent earnings call.

Microsoft continues to see strong cloud growth
Almost all of Microsoft's growth is coming from the cloud: subscription services such as Office 365, Windows Azure, and Dynamics CRM. On the call, Microsoft's CEO, Satya Nadella, noted the strong demand Microsoft has seen for its cloud services in recent quarters:

"[This] quarter is the sixth consecutive quarter of triple digit revenue growth in commercial cloud and we're now at a run rate of $5.5 billion."

In total, Microsoft's commercial cloud revenue rose 114% on an annual basis. That's certainly impressive, though it should be noted that last quarter its growth rate -- 128% -- was even higher.

Windows XP made for a difficult Windows comp
Microsoft officially ended support for Windows XP last April, leaving a number of business users stuck with potentially vulnerable PCs. Those who were still running Windows XP, and did not wish to subject themselves to possible security breaches, upgraded last fall in record numbers.

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That led to exaggerated Windows Pro revenue last year, which made this quarter's numbers look bad in comparison. On an annual basis, Windows Pro revenue contracted 13% last quarter, but Nadella argued that the contraction was not indicative of a larger move away from Windows.

"We're seeing healthy demand for Windows Pro even though we faced challenging prior year comparables in [the second quarter] as well as in the second half of the year, following the [end of ] Windows XP... support."

Microsoft's phone ambitions remain with the low-end
Microsoft is now a phone manufacturer -- but with less than 3% of global market share, Windows Phone is far from a success. Last quarter, Microsoft's phone-related revenue actually contracted on a sequential basis, though the number of handsets sold rose. Nadella explained that Microsoft continues to focus on the low-end of the market to boost Windows Phone adoption.

"[Sales of] Lumia phones top[ped] 10 million units, growing 30% year-over-year this quarter ... strength [was seen in] devices such as Lumia 500 and 600 series, our affordable smartphone[s]. In this segment of the market, the combination of our brand and value standout ... we plan to continue to build a beachhead here."

Thinking about Windows profitability
Historically, Microsoft has always charged for its Windows operating system, but the rise of free alternatives have pressured its business model, particularly in the mobile space. Microsoft has begun giving away heavily discounted Windows licenses to its hardware partners for use on devices with smaller screens.

It's difficult, however, to judge the profitability of Windows on these devices. When asked, Nadella said that Microsoft plans to profit from these devices using cloud services as well as hardware, as in some cases, Microsoft now being the one building the device.

"I think of device gross margin in some cases because we are building devices ... as well as this post-sale monetization using our consumer cloud services [such as Office 365] as the two additional levers that we have in order to be able to monetize [devices with low-cost] Windows [licenses]."

How to measure cross-platform progress
Under Nadella, Microsoft has been aggressive in bringing its services to other platforms. For example, it brought its Office productivity suite to Apple's iPad last year.

But how should investors judge Microsoft's success? According to Nadella, it is best to think in terms of subscribers, and demand for its cloud services.

"So the best way to measure our progress is Office 365 subscription growth, Azure growth and EMS growth."

The article 5 Things Microsoft Corporation's Management Wants You to Know originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.