Microsoft's Q4 Results: Follow the Money for Clues to Tech Future

"Follow the money," Deep Throat famously advised in All the President's Men. In the movie, that advice applied to unraveling the past. When applied to Microsoft's FY 2016 Q4 results, following the money provides us with a roadmap to technology's future.

The future is in search. Seriously. Really -- stop laughing. Bing was profitable for the entire year, it got love from Windows 10 users -- 40% of its use came from that group -- and it racked up $5.3 in annual revenue. For comparison's sake: Yahoo pulled in $4.98 billion over its last fiscal year.

Bing's results are impressive for several reasons: They show that Microsoft has found a way to successfully integrate search in its Windows 10 experience and, more crucially, that people are using Cortana to do a lot of searching. 

Why is this important? Because being part of the background computing experience, instead of an add-on app, provides a tremendous competitive advantage. (Remember, there was an entire antitrust lawsuit around this premise with Internet Explorer.) Because Bing is tied into both Edge and Cortana, it's got a built-in audience opportunity that's helped it to rack up a 35% rise in search revenue from the previous year. CEO Satya Nadella noted yesterday that Bing met its goal of being profitable through the entire fiscal year.

And here's another thing to consider: The $5.3 billion in annual revenue the search tool generated is going to top Microsoft's revenue from PC sales.

Which brings us to ...

The future is not in PC sales. As  Nadella said during the earnings webcast, Microsoft's consumer hardware sales were ahead of global trends for these things, but that's pretty much the equivalent of saying that your house only got lightly singed in a neighborhood inferno. Worldwide PC shipments have declined year-over-year, and are expected to keep doing so. The good news for Microsoft there was a 27% uptick in revenue, while tablets were up 9%. Given the overall cooling of the tablet market, that's not bad.

The Personal Computing division, which tracks revenue from consumer hardware, gaming consoles and phones, saw 4% lower revenue in part because of slowing computer sales -- but mostly because Windows Phone revenue plunged 70%, its fourth straight quarter of massive loss.

Nobody's going to sneeze at making $8.9 billion in a quarter -- or $40.5 in a year, which is how the personal computing division did. But looking at the quarters shows us that the division didn't finish the year strong. It made $9.4 bil in Q1, $12.7 bil in Q2 and $9.5 bil in Q3.

This brings us to the next follow-the-money moment ...

The future is in subscribing to software. Office 365 isn't quite at PC-sales-revenue levels yet -- the entire Productivity and Business Processes division only made $26.5 billion in revenue for the whole year -- but it did log a full year of revenue growth. And one big story here is that Office 365 consumer subscribers grew from 15.2 million users at the beginning of FY 2016 to 23.1 million by the end of FY 2016. That means the subscriber base grew by 52% over the course of the year.

Office 365 revenue grew 59% in Q4, making it the fourth straight quarter of big gains -- though we're still not getting breakouts of how many millions of dollars it's making. 

But that growth is small peanuts compared to the next follow-the-money moment ...

The future is in cloud services. Azure revenue more than doubled from its FY 2015 Q4 number, making for a solid year of double sales growth every quarter. The company credited a "wide footprint" for Azure sales.

One of the more interesting positioning statements during the earnings call was Nadella's contention that Microsoft's "leadership support for regulatory environments," including issues of privacy and data sovreignty (i.e. where the data lives versus which governments get to access it) make the company uniquely positioned to help businesses as they transition to the cloud.

More than 70% of Microsoft's enterprise customers now have cloud offerings attached to their deals.

The future is where the growth is, not where the biggest numbers are. Granted, it's easy to look at the final numbers for the three main business divisions and snort, "Are you bananas? The More Personal Computing division is still where the money is."

And on first glance, the differences are significant. More Personal Computing made $8.9 bil this quarter, or 32% more than the Intelligent Cloud division ($6.7 bil) and 27% more than the Productivity and Business Processes division ($7.0 bil). However, the other two divisions each had a clear narrative for the year: Continuous growth in revenue and subscribers. More Personal Computing has a different story: Hardware sales are falling and the strongest revenue growth was in Bing and in XBox subscribers.

The two stories to watch for over the next year: Which financial quarter is the one where a cloud-oriented division's earnings exceed the hardware-oriented division, and whether that trend can continue across more than one quarter.

Fiscal year 2017 is going to be a fun one to watch.

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To see Microsoft's earnings through the fiscal year, here are links to: the FY 2016 Q1 release; the FY 2016 Q2 release; the FY 2016 Q3 release; the FY 2016 Q4 release.