Editor’s note: The latest earnings report is in, and it shows that Microsoft (Nasdaq: MSFT) is succeeding in navigating the change in IT consumption models, writes Kelsey Mason of Technology Business Research.

HAMPTON, N.H. - Triple-digit year-to-year growth in both commercial cloud and Office 365 home subscribers contrasted with total licensing declines of nearly 9% year-to-year (of which traditional commercial Office declined 13%). The results suggest Microsoft has reached a tipping point in transitioning its traditional Office license base to the cloud.

Microsoft has managed to maintain relatively stable operating margins (29.4% in CY4Q14 compared to 32.5% in the year-ago quarter that benefitted by the XP end of life revenue burst) by reinforcing and capitalizing on the stickiness of Office to make this transition while driving cross-selling opportunities for its broader cloud portfolio including Dynamics CRM Online and Azure.

While moving customers to the cloud remains a priority, Microsoft realizes that hybrid IT will be the end-game for many customers. As a result, preventing defection from core, traditional software businesses such as Windows and SQL Server is a critical piece to Microsoft’s strategy in becoming the “productivity and platform company for the cloud-first, mobile-first world”. TBR believes Microsoft’s more active approach to increasing share of wallet and driving renewals will help the company succeed in this transformation.

To prevent defection, Microsoft updates its Windows business model

Microsoft continues evolving its Windows business model, by offering the operating system for free on sub nine inch devices and providing Windows with Bing to OEMs at a lower-cost than traditional Windows 8. With the launch of Windows 10 forthcoming in 2015, Microsoft will continue its business model transition by offering free upgrades for Windows 7, Windows 8 and Windows 8.1 users.

While the free upgrade will incent customers to stay on a Windows-based platform rather than defecting to devices from competing offerings such as Apple iOS or Google Android, Microsoft’s revenue opportunities directly associated with Windows will take longer to monetize. TBR believes increasing the stickiness of Windows will be key to monetizing the operating system amidst this business model transformation. To do so, Microsoft is seamlessly attaching services such as Office, Enterprise Mobility Suite and OneDrive and the promise of universal applications will add value to the Windows platform. Microsoft is the leading vendor in productivity, and by integrating Office closely with its mobile platform, will differentiate from competition and position its devices as a business-first.

Microsoft will bundle solutions to increase share of wallet within accounts

As customers move from purchasers of point products to outcomes buyers, Microsoft will adapt the way in which it sells its portfolio. The company will increasingly offer ways for customers to purchase solutions by bundling complementary offerings. TBR expects Office will be the backbone to many of these bundles as it already has a large install base and Microsoft aims to retain these customers.

In October, Microsoft launched a productivity bundle which includes Dynamics CRM, Office 365 and Power BI. The bundle allows current Office 365 customers to upgrade to the bundle at a lower cost than adding Salesforce CRM, enabling Microsoft to increase share of wallet while mitigating potential cannibalization as a result of its partnership with Salesforce. TBR expects bundling from Microsoft to continue as the company uses Office to cross-sell additional products and services

Microsoft recognizes the importance of a broad and integrated portfolio to hybrid cloud success

According to TBR’s Hybrid Cloud Customer Research, a hybrid IT environment is the end game and vendors that message pre-integrated hybrid clouds will be best positioned for success. Having sound transactional and annuity selling motions for core productivity suites position the company nicely as they segment the offering with higher margin services aimed at the enterprise mobile user

Microsoft is all-in on hybrid cloud, with Azure as the backbone, and was cited a top hybrid cloud vendor according to TBR’s hybrid cloud adoption research. In October, Microsoft and Dell announced Microsoft Cloud Platform System to provide customers with the on-premises portion of hybrid clouds. Although Dell is currently Microsoft’s only “cloud-in-a-box” hardware partner to date, TBR expects Microsoft will look to other hardware partners such as HP to expand the reach of its holistic hybrid cloud solution.