Nadella Makes a Good Impression on Wall Street

In the first quarterly earnings report since taking over as the third CEO in Microsoft's 39-year history, Satya Nadella appeared on a conference call with Wall Street analysts. While it helped that Microsoft earnings beat estimates, his debut with financial analysts was significant in that he took questions from those who will play a key role in the company's stock valuation.

Microsoft's actual performance under the new CEO's reign of course will ultimately determine how investors value Microsoft. But helping analysts understand Nadella's vision is an important first step. There were no bombshells but Nadella helped guide the analysts on how he intends to monetize the company's "mobile first, cloud first" transition. Nadella's appearance on the call didn't mark a changing of the guard, per se. However, his predecessor Steve Ballmer rarely appeared on quarterly earnings calls.

It's unclear whether Nadella will show up routinely. But it wouldn't be surprising if he becomes a regular on the calls as his ability to help lift Microsoft's stock price --  virtually flat during Ballmer's 13-year reign -- will be a key measure of his success. While Microsoft's performance and growing share in existing and new markets is table stakes, Wall Street never warmed up to Ballmer despite consistent revenue and profit growth. Nadella also needs to convince analysts that he was the right choice even as Wall Street was pushing for a seasoned CEO such as Ford Chief Alan Mulally and Qualcomm COO (now its CEO) Steve Mollenkopf.

Asked if Nadella has any major strategic changes in the works, he said the company will always be in a state of transition and ready to react to rapid shifts in market demand. "One of the things I strongly believe in is you're planning on a continuous basis, you're executing on a continuous basis," he said. "It's not episodic. The only way we're going to succeed here is by having this notion that you're planning all the time and you're also making the changes to your plans based on the changed circumstances. And I think that's the way you run a company like ours in a marketplace as dynamic as ours."

Nadella said Microsoft needs to continually build and buy new capabilities, and expressed confidence the company can do so, starting with the $7.2 billion acquisition of Nokia, which officially closed today.

Among the noteworthy questions he fielded was if and how Microsoft can make the transition from a company which relied on one-time license fees to a subscription model -- a change facing all major software providers. Nadella, with CFO Amy Hood at his side, pointed to the growth of Office 365 as a leading indicator. Microsoft added 1.1 million Office 365 subscribers in the last three months, bringing the total to 4.4 million. The company shared an interesting data point that came up last week during its hybrid cloud webinar saying that 25 percent of enterprises worldwide are using Office 365.

"We are well on our way to making that transition from moving to pure licenses to long-term contracts as well as a subscription model," Nadella said. "This is a gold rush from being able to capitalize on the opportunity. When it comes to that we have some the broadest SaaS solutions and the broadest platform solutions. That combination of those assets doesn't come often."

To that point, he told the Street what it wants to hear: "What matters to me in the long run is the magnitude of the profits we generate, given a lot of categories that are going to be merged as this transition happens. We have to actively participate in it and drive profit growth."

Posted by Jeffrey Schwartz on 04/25/2014 at 10:15 AM