Cloud, Office 365 Help Microsoft Beat Wall Street's Q2 Expectations

Microsoft's FY16 Q2 earnings beat the Street as the company's cloud inches closer to raking in $10 billion per year and Office 365 commercial seats grew by 59 percent.

Satya Nadella

Microsoft generated $25.7 billion in revenue during the second quarter of the company's 2016 fiscal year ending Dec. 31, 2015, a 10 percent year-over-year decline. Net income was $6.3 billion, with earnings per share of 78 cents, beating Wall Street analyst expectations of 71 cents.

The Redmond, Wash., software giant, meanwhile, is inching closer to its goal of attaining a $20 billion annual run rate for its commercial cloud business in the company's 2018 fiscal year. Last quarter, that figure hit $9.4 billion, up from $8.2 billion the previous quarter.

"Businesses everywhere are using the Microsoft Cloud as their digital platform to drive their ambitious transformation agendas," said Satya Nadella (pictured), Microsoft's CEO, in a statement. In a Jan. 28 earnings conference call, he claimed that "70 percent of the Fortune 500 [are using] at least two different Microsoft cloud offerings."

In short, Microsoft has found some firm footing in the competitive cloud computing market.

"Microsoft's cloud story continues to be solid; while Amazon missed a bit, Microsoft continues to show Wall Street it knows how to set and meet expectations, which the Street values highly," Merv Adrian, research vice president of Information Management at Gartner, told eWEEK. "Growth in the cloud, especially in premium services, plays to Microsoft's growing strengths and helps drive other parts of the portfolio—like Enterprise Mobility."

Microsoft is also banking on enterprises to help improve Windows 10 adoption rates. "Businesses are also piloting Windows 10, which will drive deployments beyond 200 million active devices," added Nadella.

Adrian noted that the operating system is "doing well enough that a slowing PC market didn't hurt it as much as it might have. The rise of HoloLens and Xbox as Windows platforms with Universal Windows Apps will continue this as the year unfolds, and absent any stumbles, seeding the cloud will make rain there as well."

On Jan. 4, Yusuf Mehdi, corporate vice president of Microsoft's Windows and Devices group, revealed that more than 76 percent of the company's "enterprise customers are in active pilots of Windows 10, and we now have over 22 million devices running Windows 10 across enterprise and education customers."

Demand for Microsoft's cloud-enabled productivity software suite remains strong. Office 365 commercial seats grew by 59 percent last quarter. "Office 365 subscription growth helps offset the slow move away from on-premises on Office," observed Adrian.

On the consumer front, subscriptions reached 20.6 million. The 2016 versions of the Office desktop applications are outperforming their predecessors (Office 2013).

Acquiring Acompli in 2014 seems to have paid off for Microsoft. During the call, Nadella revealed that "30 million iOS and Android active devices are running Outlook," Acompli-based versions of which the company released last year for the Apple and Google mobile operating systems.

Hardware was a mixed bag. While the introduction of the Surface Pro 4 and the company's first-ever laptop, the Surface Book, helped increase sales to $1.3 billion last quarter, the company's smartphone unit didn't fare so well. Phone revenues dropped by 49 percent year-over-year, dragging Microsoft's entire Devices segment down 22 percent.

Pedro Hernandez

Pedro Hernandez

Pedro Hernandez is a contributor to eWEEK and the IT Business Edge Network, the network for technology professionals. Previously, he served as a managing editor for the network of...