Deployment

Satya Nadella's Master Plan For Microsoft Is Starting To Work

Today, Microsoft reported solid quarterly earnings, and investors are pleased. The stock is up about three per cent after hours. Unlike Netflix and its subscriber numbers, or Facebook and its monthly active users, there’s no single stat for Microsoft that made Wall Street happy. Instead, Microsoft offered a mix of solid metrics that showed that the company’s master plan is proceeding right according to schedule.

Image: Microsoft CEO Satya Nadella

Over the two years that Nadella has held the top spot, he’s set two big goals for the company to reach by 2018: First, that Windows 10 would get to a billion installed devices, and second, that the company would get to a $US20 billion run rate for its enterprise cloud services.

These two goals guide the company’s progress, says Microsoft GM of Investor Relations Chris Suh, who describes them as Microsoft’s “north star.”

So far, so good.

Windows 10 Draws ’Em In

First, the Windows goal.

Earlier in January, Microsoft announced that there were over 200 million devices, mainly PCs and tablets, running Windows 10.

The Windows 10 strategy is a little different than how Microsoft has usually treated its Windows business. In the past, Windows was seen as the center of the universe, a cash cow that PC manufacturers and end-users alike had to pay for.

Now, Microsoft is giving Windows 10 away for free to Windows 7 and 8 users, at least until the operating system’s one-year anniversary in July.

That’s because Microsoft assumes that the more you use Windows 10, the more you’ll spend cash on its premium subscription and content services — including the Office 365 cloud productivity suite, the Windows Store app market, the Xbox Live gaming service, and the Groove Music app.

That strategy is bearing fruit. Microsoft reports that 30 per cent of Bing search revenue during the quarter was driven by Windows 10. That’s mainly because Cortana, Windows 10’s personal digital assistant, does all of her web searches in Bing by default, driving users towards Bing and its search ads.

Similarly, while the Windows Store is still working to attract big-name developers, Microsoft says that the holiday shopping season saw more sales there, too. Microsoft takes a cut of all those purchases.

Plus, Microsoft reported an uptick in transactional revenue from Xbox Live, which offers premium subscription services and a gaming-focused digital store for console and Windows 10 gamers. (It’s not clear how much credit Windows 10 should get for this — it may just be Xbox gamers fuelling the fire.)

Commercial Cloud Brings The Cash

Second, the cloud.

Microsoft announced that it hit $9.6 billion on its annualized run rate, or ARR — that number basically takes current sales and extrapolates the out for one year at the same rate, to see how much revenue Microsoft would make on a product over 12 months. (ARR is a common way to measure cloud services.)

That’s just shy of halfway to Nadella’s goal of $US20 billion ARR.

“The enterprise cloud opportunity is massive — larger than any market we have ever participated in,” Nadella said.

Demand for cloud services is through the roof, and Microsoft is rapidly gaining on Amazon’s web dominance. Of Microsoft’s three business segments, the Intelligent Cloud unit was the only one to post good old fashioned growth over the last quarter.

Microsoft Azure, the company’s cloud computing platform and its direct competitor to Amazon Web Services, reported 127% revenue growth from the same period last year. Actual computing use of Azure doubled from the same time last year, too.

In an effort to keep that growth going, Nadella said on the call, Microsoft is going to keep expanding its technological capabilities, while continuing to embrace developer-friendly technologies like the free Linux operating system.

Microsoft didn’t rock the boat or deliver many surprises on today’s call. But it did show that it’s growing in all the ways that Wall Street wanted to see. And that’s going to be enough for now.

This article was originally published on Business Insider Australia


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