5 Things Microsoft Corporation Management Wants You to Know

By Markets Fool.com

Source: Microsoft

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Microsoft shares soared on Friday, rising more than 10% following the release of its fiscal third quarter earnings report. Although Microsoft Windows revenue fell, demand for its cloud services surged, and it logged an earnings per share and top line that exceeded analyst expectations.

In its subsequent earnings call, Microsoft management reflected on its ongoing transformation, underscoring a number of key points investors should be aware of. Below are five of the most important takeaways from the call.

Demand for Office 365 continues to surge
In 2011, Microsoft introduced Office 365, its subscription-based, cloud-based alternative to its traditional Office software. Instead of buying a new suite of Office applications every few years, Microsoft offered its customers the ability to pay for a subscription instead. Demand for Office 365 has been strong since its introduction, and it continued to pick up steam last quarter. During the call, CEO Satya Nadella called particular attention to the success of Office 365 with consumers and a commitment to make Office available on every platform.

Office 365 Consumer added an average of one million new customers per month, and we now have more than 12 million subscribers, an increase of 35% over the prior quarter. We're clearly taking Office everywhere. Core to our mobile first strategy is to ensure that our service endpoints are on every mobile device, and to that end, we have seen continued momentum with more than 100 million downloads of Office on iPhones, iPads and Android tablets.

Windows revenue was down, butactivationswere up
At least for consumers, the days of paying for Windows are coming to an end. Facing competition from low-cost Chromebooks and mobile devices, Microsoft has offered its hardware partners cheaper versions of its operating system to help keep its platform relevant -- and it appears to be working. Consumer Windows revenue fell 26% during the quarter, but as Nadella pointed out, the number of Windows devices sold rose. Rather than make money on Windows itself, Microsoft is looking to monetize its platform through services.

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We're also transforming the consumer Windows business to adapt to the changing market dynamics, including lower price point devices. This quarter, while non-Pro revenue declined, activations were up. Importantly, we are now at a place where we can start to see early signs of how usage increases in services like search and gaming can drive new monetization opportunities over the lifetime of a Windows consumer device.

Business demand for Microsoft cloud services continues to surge
Perhaps the single most important aspect of the last quarter was the performance of its commercial cloud business. Microsoft has a number of enterprise-focused cloud services, including Azure, Office 365 for business, and Dynamics CRM. CFO Amy Hood highlighted the performance of the Microsoft cloud business during the call.

Overall, revenue from our commercial cloud services more than doubled again this quarter. Enterprise penetration is accelerating, with over half of all agreements signed [with customers] during the quarter, including cloud services. Within Office 365, premium workloads now make up more than 50% of the install base, and we are seeing strong attach of our enterprise mobility solutions to Office 365.

Windows is becoming a service
In total, the Microsoft Windows business declined fairly significantly during the quarter. Windows-related revenue contracted 22% on an annual basis. But that is not necessarily a bad thing. Although Microsoft may find it difficult to charge customers for a copy of its operating system every few years, it can monetize its platform through services. During the call, Nadella underscored how Microsoft is thinking about its Windows business longer term.

When we say Windows-as-a-service -- it's actually a pretty profound construct which involves us being able to not only think about what shifts with OEMs, but how do we [monetize Windows] on a continuous basis. If it's the consumer, we have things now in the store. We have subscriptions, we have gaming. And then, when it comes to the enterprise, there is management, security, servicing which is all a unique value. So there is going to be an increasing emphasis in the concept of lifetime value that we can deliver to customers [rather just upfront sales].

Microsoft accounts for cloud business in a much different way than Amazon
During the call, an analyst asked management for its take on the competing Amazon cloudbusiness, Amazon Web Services. AWS is a bit different from the Microsoft commercial cloud, and Amazon accounts for it in a different way. Microsoft includes its subscription-based software, whereas AWS is mostly composed of cloud computing and online storage. Nadella highlighted the difference during the call.

First of all, I don't think that of the comparison between Azure and AWS as the true north for me. I think about the Microsoft Cloud, because even the way we do capital, the way we measure utilization is all with the complete unit, which is of course, all of Office 365 runs on Azure. Azure AD powers all of our Cloud. So it's really its entirety that we think of as our unique value. So that means we have [software-as-a-service] which is a huge component between Office 365 and Dynamics, [platform-as-a-service], which is a huge component of Azure itself. We see many customers who would use even our PaaS services and even AWS . . . for example, you can, in fact, with a single sign-on, using EMS and Azure AD in Azure and use your resources on AWS.

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

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.