Microsoft Earnings Q4 2017: Where the Users Are in the Post-PC Era

This week Microsoft unveiled a blockbuster fourth quarter that has the company's stock trading in and around record highs on a near daily basis.

Our Lisa Schmeiser covered all the details about Q4 for the Redmond company yesterday and shared the numbers behind the very successful quarter and wrap up for their FY 2017.

I'm going to pull out a couple of items that were provided in the earnings call slides and the subsequent call itself and  they mean for the company as they move into their next fiscal year.

Office 365 Consumer

From the earnings call: In fiscal year 2017 (FY 17)  Microsoft added three million subscribers for Office 365 and also saw steady renewals across the year's growth.

What I think: This is proof that end users are becoming more comfortable with cloud-based subscriptions and perceiving more value in Office 365. With its options for up to five installs and the healthy 1 TB of OneDrive Cloud storage that comes with the subscription, it may have become a good service for many who might not have ever considered this type of subscription in the past.

Office 365 Commercial

From the earnings call: Microsoft grew their monthly active users of Office from 85 million to 90 million over FY 17. However, they seemed to have used two different measurements to gauge growth.

In their Q1 FY17 earnings call slide, they described the user base as 85 million monthly active users with no qualifiers. In the Q4 FY17 documents from yesterday they described the 90 million monthly active users as those using Office on iOS and Android.

What I think: While it is hard to determine growth without knowing the specific group they were talking about when FY17 began, it is an impressive number of monthly active users on iOS and Android for Office. If you have ever wondered why Microsoft publishes apps for their products and services to those platforms first, just look at that number and wonder no more.

Xbox Live 

From the earnings call: FY17 started out with 47 million monthly active users on Xbox Live and ended with 53 million monthly active users across Xbox One, Windows 10, and mobile platforms.

What I think: I suspect "mobile platforms" means "Windows 10 Mobile, iOS, and Android devices." Even though Microsoft no longer has a mobile phone business, there are plenty of Windows 10 Mobile and  Windows Phone 8.1 handsets around the world in the hands of enthusiasts.

One way Microsoft seems to have grown their Xbox Live user base was to offer great deals on consoles. The hardware buy likely turned into ongoing subscriptions, and either new users or current users on fresh hardware. (It's the same reasoning behind disposable razors or Keurig coffee machines -- the hardware's an initial buy but it's the repeated purchases like blades or coffee cups that make the real money.)

Yes, that did mean Microsoft saw a decrease in gaming hardware revenue, but they got increased sales of related items such as games, DLC, and rental/purchase fees for movies and TV shows. This is also another area of transformation in that digital sales are booming. I mean when is the last time you purchased a physical copy of a game?

Phone Revenue

From the earnings call:  The company started the year with a 72% decline in revenue and finished it with what was described as immaterial revenue of just $361 million. According to Andy Weir over at NeoWin who has been tracking the numbers this means the phone business, which actually does not exist as a business anymore for the most part, only earned $3 million dollars in Q4 of FY17 for Microsoft.

What I think: We have known that phones were done at Microsoft for some time but the fall has been fast and hard. Just two years ago in the same quarter Microsoft reported more than $1.2 billion in earnings for that business. I also think the use of the term immaterial was really over the top but I think people, i.e. Windows Mobile enthusiasts, need to realize there is no rescue waiting in the wings for Windows ​Mobile.

Office 365 Subscriptions vs Traditional Office Licensing

From the earnings call: As reported by Ina Fried of Axios:

"Microsoft CFO Amy Hood told analysts that, for the first time, Microsoft got more revenue from Office 365 subscriptions than from traditional Office software licensing."

What I think: These days ​Microsoft talks a lot about ​Digital Transformation for other companies however, this is a massive step in the company's own Digital Transformation.​ ​ ​Who would have ever thought they would sell more digital Office subscriptions than the self-contained software we used to buy on CDs and DVDs?

More proof that Microsoft believes in this transition was the Microsoft Inspire announcement of the new Microsoft 365 subscriptions which will provide digitally licensed copies of Windows 10 for businesses alognside of Office 365.

It is going to be very interesting to watch the next year of Microsoft's continued transformation.

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