When Microsoft (MSFT, Financial) unveiled its cloud first, mobile first strategy in 2014, it was hard not to notice the glaring absence of Windows. It was a huge strategic move by Microsoft and the company hasn’t looked back since it embarked on the cloud first, mobile first journey.
The plan was simple. With PC sales all around the world plunging year after year – and considering the fact that Windows had no stake in the mobile operating system world to speak of – the possibility of growing Windows-based revenues was almost nonexistent.
Instead of depending on Windows for everything, the company wanted to branch out into other areas and reduce its dependency on Windows – or, at the very least, reduce the impact that Windows-based revenues have on the overall growth trajectory of the company.
Microsoft seems to be close to achieving the goal of pushing Windows to become “one of” its earners instead of being “the earner” for the company.
Microsoft has three reporting segments: Productivity and Business Processes, Intelligent Cloud and More Personal Computing. It cleverly packed Windows within the More Personal Computing segment, where it shares revenue space with Gaming, Devices and Search Advertising.
In the first six months of the current fiscal, More Personal Computing was the lead earner for Microsoft, bringing in $21.117 billion in revenues. But the segment was the third best for Microsoft in terms of operating profits after Productivity and Business Processes and Intelligent Cloud.
Microsoft’s commercial cloud annualized run rate crossed $14 billion during the recent quarter, and the company is targeting $20 billion in annual revenues from cloud services by 2018. That increase of $6 billion in revenues in the next few years seems to be a given, considering the double- and triple-digit rate at which Microsoft’s SaaS and IaaS offerings are growing.
On the growth front, the Productivity segment grew 10% during the second quarter of 2017, Intelligent Cloud grew 8%, and More Personal Computing declined by 5%.
The impact of a steady decline in Windows revenues would have hurt Microsoft deeply two years ago, but the severity of that impact is slowly coming down. The More Personal Computing segment accounted for only one-third of the company’s operating profits, and that share is only going to get smaller and smaller as the other two segments keep growing. Thanks to the high-margin nature of both segments, Microsoft is finally free of Windows dependency.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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