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Microsoft today reported its earnings for the first quarter of its fiscal 2016, including revenue of $21.66 billion and earnings per share of $0.67. Analysts had expected the company to earn $21.03 billion in revenue and earnings per share of $0.59.

Microsoft’s stock was up 1.76 percent in regular trading. In after-hours, however, the company is up another 5 percent.

Office 365 had a strong quarter, adding 3 million subscribers (19.7 percent growth quarter-over-quarter) to hit 18.2 million. Office commercial products and cloud services revenue grew 5 percent with Office 365 revenue growth of nearly 70 percent.

At this point, steady Office 365 growth is not much of a surprise. The company is slowly but surely converting its traditionally most lucrative software business into a subscription revenue stream.

Microsoft saw Surface revenue fall from $908 million in Q1 2015 to $672 million in Q1 2016. The company will naturally be hoping to reverse that trend with the introduction of the Surface Pro 4 and the Surface Book.

Windows OEM revenue declined 6 percent, though Microsoft noted this is still better than the overall PC market. The company said the Windows 10 launch “spurred PC ecosystem innovation and helped drive hardware mix toward premium devices” but the reality is it wasn’t enough to see growth.

Phone revenue declined 54 percent “reflecting our updated strategy,” Microsoft said. That is in reference to the employee cuts and CEO Satya Nadella’s plan to focus on fewer devices.

Microsoft’s server and cloud businesses did well. Azure revenue and compute usage, in particular, more than doubled year-over-year.

Xbox, however, was a mixed bag. Xbox Live grew to 39 million active gamers, but Xbox hardware sales were down 17 percent year-over-year.

This was a particularly important quarter for Microsoft. The company released new versions of its biggest software products: Windows 10 and Office 2016.

This quarter also marked a change for how Microsoft reports earnings. The company now breaks down its results into three operating groups:

  • The Productivity and Business Processes segment includes results from Office and Office 365 for commercial and consumer customers, as well as Dynamics and Dynamics CRM Online.
  • The Intelligent Cloud segment includes results from public, private and hybrid server products and services such as Windows Server, SQL Server, System Center, Azure, and Enterprise Services.
  • The More Personal Computing segment includes results from licensing of the Windows operating system, devices such as Surface and phones, gaming, including Xbox consoles, and search.

There’s also a “Corporate and Other” section, into which the company throws whatever doesn’t fit into its main three categories above.

Productivity and Business Processes revenue declined 3 percent to $6.3 billion, Intelligent Cloud revenue grew 8 percent to $5.9 billion, and More Personal Computing revenue declined 17 percent to $9.4 billion. In short, the Windows group performed the worst, largely thanks to a shrinking PC business and the aforementioned change in phone strategy.

Microsoft will be looking to turn a few trends around over the next few quarters. But analysts were expecting a lot worse, which is why the company’s results and stock are overall being viewed in a positive light.

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