Microsoft Corp. (MSFT, Financial) has now firmly returned to the revenue growth path as it posted solid 7%-plus growth during the most recent quarter. The commercial cloud revenue run rate has now crossed $15 billion, and Windows now seems like an afterthought for a company that is doing exceedingly well in its cloud business.
With almost no presence in the smartphone world, Microsoft depends on PC sales to keep its Windows numbers moving. The company still makes a significant amount of money from Windows, however. During the recent quarter, the more personal computing segment, which includes Windows, gaming and devices revenues, posted $8.83 billion in sales and was the largest out of the three financial reporting segments.
With so much money still coming from the segment, Microsoft’s revenue numbers are still dependent on which way global PC sales move. But the growth of cloud and the high-margin nature of the other two segments have already reduced Microsoft’s dependency on Windows for its bottom line.
During the third quarter, the more personal computing segment was number one in terms of sales, but it came in at number three in terms of operating profit.
Combined operating income from the productivity and intelligent cloud segments is now more than double that of more personal computing. The two cloud segments are far from the end of their growth run, growing 22% and 12% respectively during the most recent quarter. That means more personal computing’s share of Microsoft’s overall operating profits, which stood at 37.49% during the third quarter, is going to continue shrinking over the next several quarters.
Microsoft would love to have all three segments growing at a rapid pace, but for some reason decided to put all of its units that are facing difficult environments in one bucket- Windows, devices, gaming and search. It is possible the company already knew the contribution from this segment to overall revenues and operating numbers was going to become smaller and smaller due to the rapid growth of cloud.
Microsoft’s turnaround seems to be nearly complete as it has successfully pushed Windows and more personal computing to third place.
Disclosure: I have no positions in the stock mentioned above and no intention of initiating a position in the next 72 hours.
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