During its January 28, 2016 earnings call, Microsoft reported solid performance and growth in key areas for the second quarter of fiscal year 2016, which ended December 31, 2015. Highlights run the gamut including widespread adoption of Windows 10, doubling the number of cloud users, and growing the number of Xbox Live users to an all-time high. Other highlights include:

• Commercial cloud run rate surpassed $9.4 billion, a 70% increase year-over-year, and almost halfway to the company’s goal of $20 billion.
• Doubled the number of cloud customers in 12 months.
• Azure revenue grew by 140% during the quarter.
• More than 200 million monthly active devices run Windows 10.
• Adoption of Windows 10 is nearly 140% faster than Windows 7.
• Consumer subscriptions of Office 365 grew to 20.6 million.
• Office 365 commercial revenue grew by nearly 70%.
• Doubled Windows Store paid transactions from PC and tablet customers during the holiday season.
• 48 million active Xbox Live users across consoles and PCs.
• Minecraft wrapped up the holiday season as the top paid app globally on Windows 10, iOS and Android, and monthly active users grew 18% year-over-year.
• $25.7 billion in revenue, down 2%, and up 3% in constant currency
• $7.9 billion in operating income, up 3%, and up 13% in constant currency
• Earnings per share were $0.78, up 11%, and up 23% in constant currency

In summary, Microsoft excelled in many areas, including a profitable holiday season in 2015.

“It was a strong holiday season for Microsoft highlighted by Surface and Xbox,” said Kevin Turner, chief operating officer at Microsoft. “Our commercial business executed well as our sales teams and partners helped customers realize the value of Microsoft’s cloud technologies across Azure, Office 365 and CRM Online.”

From a subscription company perspective, the most notable results are in Microsoft Azure, Office, Windows 10 and Xbox Live. Total subscriptions for Office, across several different versions, now exceeds 20 million, indicating that Microsoft’s move to a subscription model for that product was a good one.

“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. And consumer subscriptions are up to more than 20 million,” said Microsoft CEO Satya Nadella. “It is clear customers value the ongoing innovation we’re delivering in Office 365, and this allows us to advance further into markets like voice and information protection.”

While Office consumer revenue was down, CFO Amy Hood said recurring subscription revenue continued to more than offset the impact of the customer transition to the cloud.

Insider Take:

As Microsoft continues to migrate more of its products and services to the subscription model, it is further securing a strong financial position with recurring revenue. Also, as a best practice, it continues to add features and compatible products and services, making it less likely subscribers will abandon Microsoft for other alternatives.

One key question remains – will Windows 10 remain free or low cost for users, or will Microsoft gravitate its latest operating system to the subscription model too? Moving to Windows 10 to a subscription model could create a huge revenue stream, but it carries with it the risk that it could lose customers. Ed Bott does not believe Microsoft will follow this path though, according to his Feb. 6 article on ZDNet.

“One of the most persistent questions I hear about Windows 10 involves what happens when the free upgrade offer ends. Is Microsoft going to start charging subscription fees? After a close look at the company’s financials, I’m convinced the answer is an emphatic no,” wrote Bott.

He bases his opinion on solid data, including the fact that Windows 10 isn’t always free, so it is a revenue generator for the company. In fact, during the last half of 2015, OEMs paid Microsoft more than $6.2 billion to install Windows on new PCs, according to Bott.

Regardless of the direction Microsoft goes with Windows 10, we hope it handles its decision better than it has with some of its recent bungles with its announcements of changes to Office 365 and OneDrive. In the meantime, we anticipate Microsoft will continue to set an example for other companies migrating from other business models to the subscription model.