During Microsoft’s Q3 2014 Earnings Conference Call, Mr. Satya Nadella, CEO, signaled an important transition for the business: from “reinvention” to execution of its “Mobile First/Cloud First” Strategy. This signal can be found in Mr. Nadella’s response to a question posed by Mr. Keith Weiss of Morgan Stanley.
Mr. Weiss asked if Mr. Nadella is ” . . . reviewing the businesses? And should we expect any big changes in the strategy of Microsoft?” (this quote is excerpted from a transcript of Microsoft’s Q3 2014 Earning’s Conference Call. Readers can review the entire transcript on the Seeking Alpha web site).
Mr. Nadella responded to this question by emphasizing ” . . . this mobile-first, cloud-first thing is a pretty deep thing for us.” (ibid). The signal of transition sends an important message to anyone following Microsoft®: the strategy has been vetted, accepted, and is now being implemented across the organization.
One can argue the performance of the business, for the quarter, as it’s represented in the report is evidence of the transition. For revenue to grow by 8%, year-over-year, is a significant, positive achievement. Microsoft no longer appears as a “software REIT”, resting comfortably in its niche. Rather, the company has assumed some of the qualities of a high growth story. In comparison to Google, which, one can argue best typifies this type of “new” business, the growth trajectory of Microsoft’s revenue performance came within 33% of the former’s own year-over-year performance for the same calendar quarter.
But the story gets better. Office 365, which is Microsoft’s cloud, SaaS, offer grew over 100%. Mr. Nadella and Ms. Amy Wood, CFO publicized an annual run rate of $2.5 Billion for this product, 28% better than the year-over-year performance of Google’s “Other Business” segment, which was reported as producing $1.8 Billion for the same time period.
Perhaps readers will want to recalibrate their notion of Microsoft’s likely performance over coming quarters as the result of gaining an understanding of what the signal means for Mr. Nadella and the rest of the Management team.
Disclaimer: I’m long Microsoft
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