Microsoft will face a tough challenge to maintain its revenues in the face of declining Windows license sales, which dropped by 22 percent in its most recent earnings report, analysts believe.

The company was forced to admit its Windows revenues tanked last week, even as it reported $4.98 billion in net income on $21.7 billion in total revenues over the past quarter, up from $20.4 billion a year ago.

Microsoft might still making money, but ComputerWorld’s Gregg Keizer posits that the company will struggle to maintain its margins going forward, with Windows license sales suffering their second straight double-digit decline, following a 13 percent drop in revenue during the last three months of 2014 which represented a $455 million decline.

Keizer went to great lengths to breakdown the decline of Microsoft’s Windows business, showing the company earned $1.2 billion less in Windows OEM revenues compared to the first quarter of 2014.

Microsoft did its best to explain these losses during its earnings call, blaming the decline on a poor-performing PC market and the end of the Windows XP replacement cycle. The company also said many consumers were preferring to buy low-end Windows devices which derive less licensing revenue due to Microsoft’s subsidies for such devices.

CEO Satya Nadella also tried to play down the losses, saying he was less concerned with pulling in revenue now and more excited about the future opportunities that lie in store with the upcoming Windows 10 operating system, which the company has already decided to give away for free to consumers running Windows 7 and 8.

Nadella is clearly betting on Microsoft’s rapidly growing Azure cloud, plus “services like search and gaming can drive new monetization opportunities over the lifetime of a Windows consumer device”, to offset the decline of Windows sales, but one analyst believes the company will have a tough time making the transition.

Jan Dawson, chief analyst at Jackdaw Research, told ComputerWorld it would be some time before we can see if Nadella’s strategy works. “I think it will take two to three years to get a better sense of where this will end up,” the analyst predicted, though he wasn’t exactly brimming with confidence.

“Long term, Windows revenue will continue to decline,” Dawson said. “They bought the [Nokia] phone business, but the underlying trend is that they’re losing far more on the hardware and on the consumer side than they will make up on the cloud and commercial. That’s a fundamental problem.”

It’s also unclear what Microsoft ultimately intends to do about Windows. At the time it said it was giving Windows 10 away for free, the company said it would be doing so for “one year”, without really elaborating on what comes next. One idea that’s been mooted is a possible subscription model – Windows-as-a-Service – as Rob Helm, an analyst at Directions on Microsoft, previously said.

“In general, Microsoft is trying to move to subscription pricing for all its products,” Helm said in an interview with SiliconANGLE earlier this year. “For the major PC software products like Office, it would like to get everyone on per-user subscriptions. For organizations, it has already added a per-user subscription option to license Windows Enterprise, the premium edition.” Alternatively, a more dramatic course might be to go ahead and just open-source the whole thing, something that’s “definitely possible” at some stage, according to Microsoft engineer Mark Russinovich,

Unfortunately for Microsoft it doesn’t really have any choice but to push ahead with whatever strategy it decides upon. The reality is that the days of its old business model are all but numbered in a world where its biggest rivals – Apple and Google – both give away their main operating systems for free. Nadella knows this, and is trying to transition to the company to newer markets and opportunities, but faces a monumental challenge in trying to maintain its revenues at the same time.

“Microsoft’s challenge is to move from software, where its traditional business has had a 90% margin, to cloud, where the gross margin is around 40%,” Dawson told ComputerWorld. “It’s heading toward a very different set of businesses from what they have traditionally sold.”

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