Here's the good news: Microsoft's office subscription business continues to grow and it's stanching the bleeding on the Windows computer manufacturing side. Here's the bad news: The company's earnings took a 6% year-over-year dip and Microsoft's phone business could be on life-support. Last quarter, Microsoft announced that phone revenue had declined by 49% year-over-year as a result of the strategy change in July 2015 -- that was when they laid off nearly 8,000 employees working on the phone business. Microsoft's latest earnings report (third quarter of 2016, which were announced Thursday) report another 46% year-over-year decline. What, exactly, does that leave of its phone business? "Microsoft has given no indication that they are ready to pull out of the smartphone business. But they surely have to be scrutinizing their challenges of swimming up hill in the smartphone business and eventually have to deal with this issue," said Creative Strategies President and Analyst Tim Bajarin. Microsoft contends that this steady decline is what they predicted when the company announced that summertime restructuring. Company officials told me that what we're seeing is a continuation of that re-calibration. By that measure, we may see the decline end by late 2016. Microsoft's consumer business is being buoyed by strong revenue growth in the Surface business. Sales of the newish Surface Pro 4 and Surface Book helped propel a 61% revenue increase. Unfortunately, the company is not revealing actual unit sales numbers. "The Surface sales are very impressive, which tells me two things. The 2-in-1 category, specifically detachables, are strong. Consumers want them, and the Surface Pro 4 and Surface Book are winners," said Patrick Moorhead, principal analyst for Moor Insights & Strategy. In the meantime, revenue from partners pre-installing Windows on their devices is still on decline, but while Windows equipment manufacturing revenue declined 19% a year ago, it only slipped 2% this quarter. That sounds like progress. Microsoft told me that its Windows "Original Equipment Manufacturer" (OEM) business continues to outperform the underlying PC market, which has seen even bigger shipment declines in recent months. "This is a repeat story of what has happened over the last year. Windows OEM ebbs and flows with the state of the PC market which in Q1, was down. The PC market was down 10% in units and Windows OEM was down," said Moorhead. While the personal computing business (which includes Xbox and Surface) remains pretty big at $9.5 billion, cloud and productivity now make up almost $13 billion in revenue. That's where Microsoft is seeing some of the strongest growth. Office 365 revenue jumped by 63% and its Azure cloud service revenue bounced to a hefty 120% growth. Microsoft is also making some nice inroads in the search space, reporting 18% revenue growth, which the company attributes to Windows 10 adoption. Despite the bits of good news, Microsoft earnings are, year-over-year, down slightly. Revenue at the third quarter mark last year was $21.7 billion. This quarter, it came in at $20.5 billion. "It's no surprise earnings are down since PC sales last quarter were off 10% and much lower than most researchers predicted. We believe PC sales will continue to be weak through 2016," Bajarin said. "We believe PC sales will continue to be weak through 2016." He also worries that while Microsoft is seeing big gains in the cloud business, it will have to work extra hard to protect it as competition grows. In the earnings release, Microsoft CEO Satya Nadella noted that businesses are increasingly choosing Microsoft to help them transform their companies. “As these organizations turn to us, we’re seeing momentum across Microsoft’s cloud services and with Windows 10," he said in the release. Windows 10 is now on 270 million devices but it's also not quite helping to turn the tide on the OEM front. Also, it's being held responsible for a $1.5 billion revenue deferral. Essentially, the company is now deferring some Windows 10 revenue until consumers dump their devices for a new one. That revenue deferral is the primary reason Microsoft's overall revenues appeared to decline by 6% year-over-year. "On a GAAP (generally accepted accounting principles) base revenue was down 6%. Adjust for Windows 10 deferral and it grew 2% and if you adjust for foreign currency headwinds, revenue grew 5%," said one Microsoft executive. Have something to add to this story? Share it in the comments. TopicsMicrosoftWindowsSurface looks strong
A slight decline