But the other story is one of a fast-growing services company. The server & tools division, which is bigger than the Windows division, recorded $5.5 billion in revenue as sales grew by 9% year-over-year. The Azure platform has increased the number of enterprise customers by 25% year-over-year, and SQL Server revenue grew by 16%. Business revenue grew by 7%, with the cloud-based Office 365 achieving a $1.5 annual run rate.
Overall the company reported $19.9 billion in revenue, up about 10% year-over-year. Analysts, for some reason beyond me, expected nearly 15% revenue growth. EPS, adjusting for the inventory charge this year and a goodwill impairment last year, fell by a penny to $0.66. Analysts were expecting $0.75 in EPS.
In a world where the PC market is declining by a double-digit percentage annually Microsoft Corporation (NASDAQ:MSFT) managed to grow revenue by 10% and keep earnings basically flat. Clearly, it’s time to panic.
Office 365
One of the big worries about Microsoft Corporation (NASDAQ:MSFT) is that the company won’t be able to keep selling people new versions of Microsoft Office every few years, especially with alternatives like Google Inc (NASDAQ:GOOG) Docs. But Microsoft is shifting its business model for Office to a subscription service, and so far it’s seen success. Instead of having to buy new versions users and businesses simply subscribe to Office 365 for a monthly fee. For home users the cost is just $10 per month, or $100 per year, far less than the typical price of buying the software upfront. Businesses pay per user and also receive business-orientated services like enterprise-grade email and other IT services.
This business model allows Microsoft Corporation (NASDAQ:MSFT) to avoid the trouble of trying to sell users and businesses on upgrades and instead gives the company a stream of recurring income. Office 365 now has a $1.5 billion annual run rate, up from $1 billion just a few months ago. I suspect that eventually Office 365 will make up most of Microsoft’s Office revenue, and with hundreds of millions of people using Office around the world there’s plenty of opportunity.
It should be noted that 85% of the Business division, which contains Office, is from businesses while only 15% is from consumers. Because of this, the shift to tablets on the consumer side shouldn’t affect things very much at all. Microsoft Corporation (NASDAQ:MSFT) guided for mid single-digit growth for business revenue and a decline in consumer revenue, so there should be net growth going forward.
The Business division has fantastic margins, and the operating margin for the division actually increased year over year to about 67%. $4.8 billion of the $6 billion in operating income came from the Business Division, and the continued success in the enterprise should help to maintain these levels.
The big competitor to Office is Google Inc (NASDAQ:GOOG) Docs, but Office has some real advantages. Google Docs is aimed mainly at consumers and provides a minimal set of features, good enough for many but not nearly as polished an experience as Microsoft Office. The enterprise overwhelmingly uses Microsoft Corporation (NASDAQ:MSFT) Office, and it’s unlikely that there will be a mass exodus to Google Inc (NASDAQ:GOOG) Docs, especially now that Microsoft offers a cloud-based version. Google will pick up some share, but Microsoft will not let its biggest cash cow be taken away without a fight.
