What Microsoft's Q2 Results Can Tell You About the Rest of the Year

What Microsoft's Q2 Results Can Tell You About the Rest of the Year

Here's how Microsoft will be aiming its offerings at you for the rest of 2016.

The company is facing a "relatively flat market" in the tech space, and has identified three different initiatives for growing revenue. The consumer-facing one is, in CEO Satya Nadella's words, tied to Windows 10: "As we unify and grow the Windows 10 platform, we grow new monetization opportunities with the Windows store, search, and gaming."

Citing solid holiday wins across the Xbox platform, Bing and the Windows Store — all of which were tied to Windows 10 features and integration — Nadella added that Microsoft would also be banking on Surface's favorable consumer reception for future growth. The Surface business racked up $1.3 bil in domestic sales this past quarter, thanks to the launch of Surface Pro 4 and the rollout of the Surface Book, and now the company is turning to markets in Europe and Asia, including China, Japan, the UK, France, Germany.

The Surface is the bright spot in Microsoft's mobile hardware segment, which is part of the overall "More Personal Computing" business division. Phone performance sank the overall device division revenue, and CFO Amy Hood focused on the Surface as the bright spot; its revenue was up by 22%. Microsoft does not break out individual product line sales under each division, so if we assume that the $1.3 billion number cited early by Nadella during the call is accurate for the Surface's revenue, then it's up from $1.01 billion year-over-year. The entire More Personal Computing division earned $12.7 billion in revenue.

While it's nice to see the Surface perking up. the way the numbers look, Windows and OEMs are still generating a large percentage of the segment's sales. Since computer sales are projected to keep slumping and Hood said in the call, "We expect non-Pro [Windows] revenue to align more closely with the consumer PC market," that's a sign the division is likely to earn less in Q3 2016. Watch closely to see whether the Surface sales will be a breakout for More Personal Computing next quarter.

Another definite sign that the company is banking strongly on the cloud: It downplayed the drop in consumer-facing Office revenue (down 14%) by pointing out that Office 365 revenue is up 70%.  The Office revenue and Office 365 revenue was not broken out, so we don't know exactly how big that 70% growth is in hard currency. Nadella backed his company's cloud-first play by noting how well the cloud-centric Office 2016 is doing and stressing Office's adoption on other platforms: "Consumer response to Office is strong. Office attach rate is up. Office 2016 adoption is out-performing Office 2013 over the same time period of time. Consumer subscriptions are up to more than 20 million.

"We’re also enthusiastic about how people use Office on other platforms. On iOS and Android, Skype has more than 900 million downloads and Office apps surpassed 340 million this quarter. There are also over 30 million iOS and Android active devices running Outlook."


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