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CEO Nadella Promises Microsoft Will Deliver "Courage in the Face of Reality"

The newly installed Microsoft chief presides over his first earnings conference call.


Microsoft CEO Satya Nadella praised his company’s recent efforts to both grow where it is strong, but also to bulk up in areas where it has been weaker.

“I sum up this quarter in two words, execution and transition,” Nadella said. “What you can expect from Microsoft is courage in the face of reality.”

Earlier on Thursday, Microsoft posted better-than-expected earnings led by growth in its cloud services business.

Nadella said that even though he is a 22-year Microsoft employee, he is trying to look at the company with “fresh perspective.”

“It’s been an incredibly busy couple of months,” Nadella said, during his first earnings conference call as CEO.

A big part of Microsoft’s transition will be moving beyond the PC businesses of Office and Windows that have defined the company for much of its first three decades. The opportunity, as Nadella has said repeatedly, is to expand Microsoft’s position in cloud-based services and mobile devices.

“Nearly everything we do will become more digitized,” he said. “It’s a rich canvas for innovation and a great growth opportunity for Microsoft.”

Among other details that Microsoft disclosed as part of its earnings report:

  • Surface accounted for $500 million in revenue, an increase of more than 50 percent. Also, more of the revenue was from the new Surface 2 and Surface Pro rather than working through inventory of the original Surface.
  • The home version of Office 365 now has 4.4 million paid subscribers, up one million during the quarter.
  • All told, Office 365 is on a $2.5 billion run rate.
  • PC sales were a mixed bag, with business Windows up 19 percent and consumer Windows PC sales down nine percent.
  • The company’s “unearned revenue” — money it takes in for future quarters, was ahead of expectations as it did well in signing multi-year licensing deals.

Update: In a question and answer session, Nadella described his approach as not trying to engineer a big shift at Microsoft but rather make it better able to both execute and adjust at the same time.

“It’s not episodic, if you will,” Nadella said. “We are all the time reviewing.”

Asked about the shift to subscription-based revenue, Nadella said Microsoft is “well on our way to making that transition.”

The business metrics will vary, he said, with different profit margins in different parts of the business, but he added that Microsoft is making that shift aggressively to take advantage of the opportunity. “This is gold rush time,” he said.

CFO Amy Hood said that the shift to subscription will help Microsoft financially, but added that there are additional benefits that come from subscription businesses, including the increased customer satisfaction that comes as consumers and businesses are always on the latest version of the company’s products — something that clearly has not always been the case.

Nadella was also asked about the impact of Microsoft’s decision to offer Windows for free on devices with a display smaller than nine inches.

He described it as part of an effort to make sure that Windows can be on a wider range of devices, which he said is key to the future of that business.

“That’s going to define the health of the ecosystem,” he said.

Nadella said the company also wanted to be ready for a world that includes wearable devices and the Internet of Things.

“We want to participate in all of those,” Nadella said. “We want to be able to price by category.”

The conference call is still under way. Check back for frequent updates.

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