Microsoft Corp. (NASDAQ: MSFT) released its fiscal year 2016 fourth quarter and fiscal year end financials for 2016 on Tuesday, revealing significant growth in key categories including Office 365 subscriptions and cloud services revenue.

Highlights for the fourth quarter of fiscal year 2016 ending June 30, 2016 include:

• Revenue of $20.6 billion GAAP, down 7 percent year-over-year, due to the net revenue deferral of $2.0 billion from Windows 10
• Gross margin was $12.6 billion, down 14 percent year-over-year, due to the net revenue. deferral of $2.0 billion from Windows 10 and an increase in the cost of revenue
• Cost of revenue was $8.0 billion, a 7 percent increase year-over-year.
• Operating income of $3.1 billion GAAP, compared to a loss of $2.1 billion in the prior year
• Net income of $3.1 billion GAAP
• $6.4 billion was returned to shareholders during the quarter.
• Revenue in Productivity and Business Processes grew 5 percent to $7.0 billion
  • Office commercial products and cloud services revenue grew 5 percent, driven by Office 365 commercial revenue growth of 54 percent.
  • Office consumer products and cloud services revenue grew 19 percent.
  • Azure revenue grew 102 percent with usage more than doubling year-over-year.

Highlights for the fiscal year 2016 include:

• Revenue of $85.3 billion GAAP, compared to $93.6 billion for FY 2015
• Operating income of $20.2 billion GAAP, compared to $18.2 billion for FY 2015
• Net income of $16.8 billion GAAP, compared to $12.2 billion for FY 2015
• Office commercial revenue increased $249 million, or 5 percent, due mainly to subscriber growth.
• Office consumer revenue increased $124 million, or 19 percent, due mainly to subscriber growth.
• Office 365 consumer subscribers increased to 23.1 million.
• Windows 10 has increased to 350 million active devices, the fastest adoption rate of any Windows release.
• Xbox Live monthly active users grew 33 percent, year-over-year, to 49 million.
• Server products and cloud services revenue grew $253 million, or 5 percent, driven by 102 percent revenue growth of Azure.
• Revenue for devices and gaming both decreased. Xbox hardware revenue declined by 33 percent, but Xbox Live revenue increased by 4 percent with higher volume of transactions and revenue per transaction.
• Companies including Facebook, Hershey, Discovery Communications and Cushman Wakefield adopted Office 365.

Microsoft’s largest category of revenue for FY 2015 was in the More Personal Computing Category at $40.5 billion, followed by Productivity and Business Processes at $26.5 billion and Intelligent Cloud at $25.0 billion and a loss of $6.7 billion in the Corporate and Other category.

While there were a lot of ups and downs in Microsoft’s fiscal year 2016, it experienced a lot of growth in the subscription arena. Its Office 365 subscriber base has grown, Xbox Live subscription revenue continues to grow, as does Microsoft cloud solutions including Microsoft Azure.

While the company has said it won’t charge consumers a subscription fee for Windows 10, it will no longer be available as a free upgrade, as of July 29. At that point, it will cost $119 for Windows 10 Home and $199 for Windows 10 Pro, said Forbes. In addition, Microsoft finally addressed rumors that Windows 10 would require a subscription. That is true but only for Windows 10 Enterprise E3 users who will pay $7 per user per month, or $84 per user per year.    

“This past year was a pivotal one in both our transformation and in our partnerships with customers who are also driving their own digital transformation,” said CEO Satya Nadella in Tuesday’s earnings call.

“In closing, I want to reflect on the opportunity ahead of us. Simply put, businesses will not just use digital technologies, but they will become digital companies. This generates an enormous opportunity for Microsoft and our partners. We are the ones who can empower digital transformation across all industries, companies and geographies with our technology and platforms,” Nadella added.

What’s next for Microsoft? The company will release an anniversary update to Windows 10 next week, Microsoft will complete its purchase of LinkedIn for a cash price of $26.2 billion during FY 2017, and it will drive growth in gaming by connecting fans on Xbox Live across Windows 10, iOS and Android platforms.

Insider Take:

While Microsoft experiences financial fluctuations, its business model is also shifting, becoming less dependent on licensing fees and product sales and more on products and services that will produce recurring revenue. Its dominance in the cloud arena and the lack of solid competition in terms of Office 365 and operating systems will also help secure a long-term future in which consumers and enterprise users are dependent on Microsoft for business productivity.

In its first year, Windows 10 didn’t make Microsoft any money, but its widespread adoption shows that it is far more popular than previous versions of the operating system. Microsoft deferred $2 billion in potential revenue by giving away the operating system for its first year. Starting next week, Microsoft will finally get to cash in on Windows 10 to recover that revenue. That will help shore up its finances as Microsoft finalizes the sale of LinkedIn.