Shares of Microsoft (NASDAQ:MSFT) surged last week following the release of a strong quarterly report: The Windows-maker exceeded analyst estimates for both earnings and revenue. The popularity of Microsoft's cloud offerings continues to grow, and though the Windows business remains weak, it performed better than anticipated.
During the company's subsequent earnings call, CEO Satya Nadella and CFO Amy Hood discussed the trends currently affecting the company's business and their expectations for the future. Here are five of the most important quotes from that call.
Demand for Windows 10 has been strong
Microsoft's latest operating system, Windows 10, made its official debut last July. Despite ongoing weakness in the broader PC market, demand for Windows 10 has been strong. During the call, Nadella quantified its popularity.
"We crossed the 200 million [installation] milestone, and Windows 10 is outpacing adoption of any of our previous operating systems. In fact, adoption is nearly 140% faster than Windows 7."
Azure is benefiting from cross-buy
Microsoft's business increasingly depends on the demand for its cloud services, particularly Office 365, Azure, and Dynamics CRM. Although these services exist as stand-alone products, there's some degree of network effects at play. During the call, Nadella detailed customer behavior.
"We see that Azure customers who also purchase Office 365 consume 8-times more Azure than other customers. More than 70% of the Fortune 500 have at least two different Microsoft cloud offerings, up 13 points year-over-year....And we...see network effects...if you're using Office 365, you want to extend the data in Office 365 by building applications that join it with some other data inside of our Data Lake service in Azure...Azure becomes the natural choice for such application development."
Foreign exchange weighed on Microsoft's business
The relative strength of the U.S. dollar has been a stumbling block for Microsoft, limiting its sales. Microsoft's quarterly revenue fell 2% on an annual basis last quarter, but, correcting for currency, rose 3%. During the call, Hood explained that a strong dollar would continue to be a drag on Microsoft's results.
"We [had] expected the [foreign exchange] impact on total revenue to be about 3 points in [the second half]. For [the third quarter], given the recent strengthening of the U.S. dollar, we now expect an overall impact of 4 points. By segment, we expect 5 points of impact on Productivity and Business Processes, 4 points in Intelligent Cloud, and 3 points in More Personal Computing."
Expectations for the future
Hood also offered up guidance for all of Microsoft's segments during the call. Even with currency proving a drag, Microsoft is expecting growth.
"In Productivity and Business Processes, we expect revenue of $6.4 billion to $6.6 billion...This represents 6% year over-year-growth in constant currency, driven by Office 365 momentum and Dynamics Online.....For the Intelligent Cloud segment, we expect revenue between $6.1 billion to $6.3 billion...Continued customer preference for our hybrid solutions will drive sustained growth in server products and cloud services and robust demand for Enterprise Services. We expect this business to continue to grow double-digits....For More Personal Computing, we expect revenue between $9.1 billion and $9.4 billion."
Expanding Office's reach
Microsoft offers its Office software suite on a wide variety of platforms -- not just Windows-powered PCs, but also iPhone, iPad, and Android-powered devices. Initially, Microsoft had been reluctant to offer Office on mobile devices outside the Windows ecosystem, but relented in 2014, using its mobile applications to make its Office 365 subscription service more appealing. Since then, Office 365 subscriptions have surged. Last quarter, a record 20.6 million consumers had active subscriptions, up 18.2 million in the prior quarter. During the call, Nadella explained the company's general thought process around its Office business.
"We want to make sure the Office subscription -- both to consumers as well as to enterprise subscribers -- is valuable across all their devices...it speaks to the vision that we have, which is the cloud is what enables the mobility of the human experience across all of the devices in your life...there will be more devices, and we want to make sure that we're adding value...if we add value in that context, [customers] will be more inclined to retain or purchase the Office  subscription. So that's been our goal and that's working well and it sort of shows up in our [growth figures]."