Nadella’s Cloud-First Microsoft Is Off to a Great Start

23 Oct 2015 | Author: | No comments yet »

Microsoft’s new businesses shine, but PC software still sags.

Microsoft reported yesterday (Oct. 22) that its revenue was up for the past quarter—despite poor phone and Windows sales—and Wall Street was pleased.Microsoft Corp on Thursday reported a modest rise in profits in the past quarter, beating most analyst forecasts, saying its new focus on cloud-based software is delivering results.San Francisco: Microsoft may still be suffering from lagging sales of personal computers, but the tech giant has taken some cues from rivals like Apple and Google — and it’s now seeing substantial growth in more promising lines of business ranging from mobile apps and advertising to online games and cloud computing.

Redmond’s most recent financial results show he’s doing brilliantly at making Microsoft into a cloud powerhouse, which might solve its more obvious problems in mobile. The US tech giant said third-quarter profit edged up 2 percent to US$4.6 billion, while revenue dipped 12 percent to US$23.2 billion, hit by currency movements. “We are making strong progress across each of our three ambitions by delivering innovation people love,” Microsoft chief executive Satya Nadella said. “Customer excitement for new devices, Windows 10, Office 365 and [cloud computing service] Azure is increasing as we bring together the best Microsoft experiences to empower people to achieve more.” Barclays PLC analyst Raimo Lenschow called it a “strong and clean quarter” for Microsoft, saying the company “exceeded consensus on most metrics.” Under Nadella, Microsoft has been shifting to offer more services through the Internet cloud to adapt to a new landscape in which mobile devices have become more important. Investors drove the company’s stock price up more than 8 per cent in late trading Thursday, after Microsoft issued an earnings report that showed evidence of that transition.

The last time Microsoft’s stock price was that high, the world was just getting used to Windows 2000 (XP was over a year away), Steve Ballmer was still getting used to his new role as CEO of Microsoft, and Destiny’s Child’s “Say My Name” was topping the charts. Microsoft’s shares shot up yesterday as the company revealed its cloud services group, which includes Windows Server and its Azure datacenter services, grew 13 percent year over year when corrected for currency fluctuations. Microsoft said that in the just-ended fiscal first quarter, “intelligent cloud” revenue grew 8 percent while personal computing revenue slipped 17 percent. “We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity,” Microsoft chief operating officer Kevin Turner said. Licensing payments from PC makers were down 6 per cent, a fifth straight quarter of decline, a sign that the July launch of Microsoft’s Windows 10 operating system failed to spark an immediate revival in sales.

A few data points: When the stock market closed on Thursday, Amazon, Google and Microsoft — arguably the three largest cloud businesses — declared their quarterly earnings. Since then, the company has released its newest operating system, Windows 10, and showed off a bunch of new original hardware, including the company’s first real laptop. One hour later, their collective market capitalization had grown by more than $100 billion because of their robust results, fueled partly by cloud growth. Digging in, Amazon had more operating income from Amazon Web Services, its business renting computing and software applications, than it did from combined sales of goods in the United States and internationally.

Microsoft also reported hefty increases in the number of people paying for the Xbox Live online gaming service and for Office 365, the subscription version of its popular email, document-editing and other “productivity” programs. Microsoft said advertising revenue from its Bing search engine grew to more than $1 billion (Dh3.67 billin) for the quarter, allowing the Bing business to show a profit for the first time. Microsoft’s Office 365, a cloud-centric software application, started in June 2011 and has 18.2 million users; 16 percent of them, 3 million new users, showed up in the last three months. Even with Windows 10 launching, Microsoft’s revenues selling Windows on new PCs declined by 6 percent (“performing better than the overall PC market,” the company said, which is depressing.) Xbox sales were down.

While the earlier cuts fell primarily on the Nokia division, a spokeswoman said the new layoffs “were spread across more than one business area.” PC makers like Hewlett-Packard and Lenovo are still hoping Windows 10 will boost PC sales this fall, when they’ll be offering more new models for sale. And Microsoft’s phone revenue plummeted by 54 percent, “reflecting updated strategy.” Apparently, Microsoft’s “updated strategy” is to sell hardly any phones. But Thursday’s report showed Nadella’s increasing emphasis on other segments that promise more potential for growth. “I think he is realistic about the role of Windows,” said Gartner tech analyst David Smith. I’ve written before about how Microsoft appears to be shooting itself in the foot with the Lumia 950 and 950XL, with devices chief Panos Panay appearing less than pumped about the new phones as he presumably prepares his notional Surface Phone for somewhere in the vague future.

I got some flack on Twitter for implying that Windows head Joe Belfiore’s upcoming nine-month vacation is in some way tied to the five years of futility he’s suffered leading first Windows Phone 7, then WP8, and now Windows 10 Mobile. Nadella told analysts Thursday that Bing’s advertising growth got a boost because Windows 10 lets PC users ask questions of Cortana, Microsoft’s voice-enabled digital assistant, which provides answers from Bing. Analysts say Nadella’s goal is to build a broad ecosystem of interrelated products, offering some for free — including Microsoft apps for Apple and Android devices — while making money from others. Pointing out that he’s in charge of all of Windows 10, even the successful parts, Belfiore retorted that “I just put the Start menu back, got Cortana on the PC, helped ship Continuum so devices flex …

By getting Windows 10 onto more computers, he’s also hoping to persuade independent app-makers that there’s an audience for apps that work with Windows on PCs, phones, tablets and gaming consoles. Windows 10 is now running on 110 million devices, according to Microsoft, although it hasn’t said how many are new PCs and how many are older machines whose owners took advantage of the free upgrade. Great reviews for the Surface Pro 4 and Surface Book will have Microsoft’s premium products flying off the shelves and potentially drive a halo effect for other, less expensive Windows laptops and tablets.

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