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Technology

How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years

When Satya Nadella made his first public appearance as the new CEO of Microsoft in 2014, he did something very unusual for a leader of the software giant.

“He made a pronouncement on day one — the world is about cloud first, mobile first,” Microsoft Chairman John Thompson told a group of investors, entrepreneurs and reporters at an event earlier this month hosted by Lightspeed Venture Partners in San Francisco. “He never mentioned Windows one time.”

Windows was the proprietary Microsoft operating system that everyone knew and the foundation for so much of the company’s success under Bill Gates and Steve Ballmer, Nadella’s two predecessors. Thompson said that while Nadella’s omission didn’t attract much attention at the time, he was making a bold statement about what to expect under his leadership.

“What he was telling the world was we at Microsoft have to be ready to embrace the cloud, and we at Microsoft have to be more about our technology running on all platforms,” Thompson, who’s a venture partner at Lightspeed, said at the event.

Since that point, Nadella has delivered. Microsoft has emerged as a major vendor of cloud computing services, especially for big businesses, challenging Amazon Web Services in the rapidly growing cloud infrastructure market. And Microsoft has turned into an ally of the open-source development community, bringing some of its software to the Linux operating system.

Investors have been particularly rewarded.

During Ballmer’s 14-year run, Microsoft’s stock mostly went sideways. But since Nadella took over on Feb. 4, 2014, the share price has almost tripled, closing on Tuesday at a record $105.95. With a stock market value of over $800 billion, Microsoft is the world’s fourth most valuable company, behind only Apple, Amazon and Alphabet.

In addition to embracing open source, Microsoft has generally become a more friendly partner, and less of a feared adversary. Nadella has surprised people in the industry by announcing partnerships with competitors, including Red Hat, Salesforce and even Amazon — to boost the Azure cloud, Office apps and the Cortana voice assistant.

Things looked very different in early 2014. At the Lightspeed event this month, Arif Janmohamed, a partner at the firm, asked Thompson why the board had selected Nadella to be Microsoft’s new CEO.

“Because no one in the Valley wanted a damn thing to do with Microsoft,” Thompson said.

Kirk Materne, an analyst at Evercore ISI, said Nadella has dramatically altered Microsoft’s culture for the better. In particular, Materne said there’s one important concept that Nadella focuses on in his 2017 book, “Hit Refresh.”

“‘Empathy’ is on every other page,” Materne said in an interview. “I think Microsoft came from a point where it was a little bit more of an our-way-or-the-highway kind of model. Clearly that’s not where they are today.”

Microsoft reports fiscal fourth quarter results on Thursday, and analysts are expecting the company to close out the year with 22 percent revenue growth to $109.5 billion, according to Thomson Reuters, marking the fastest expansion since 1999. All that while maintaining the profit margins that investors demand.

Microsoft’s changing business model has largely focused on a move away from delivering packaged software and toward selling subscription-based cloud services.

Getting to this point has been somewhat of a slog for Nadella. The average annual revenue growth over his four years is 6.5 percent, which is less than the 11 percent annual average under Ballmer.

But today, close to two-thirds of Microsoft’s revenue is recurring, coming from subscriptions that “are inherently more sticky,” than licenses Materne said. He also said the company is producing stronger cash flow now.

Perhaps most importantly, Microsoft has regained its relevance in the developer community, after ceding its position of dominance to Apple, Facebook and Google.

On Ballmer’s watch, Microsoft sought to push Windows for mobile devices, first with Windows Mobile and then with Windows Phone. Microsoft also made the highly questionable (and ultimately disastrous) decision to pay more than $7 billion for Nokia’s Devices and Services business.

The deal closed two months after Nadella became CEO, and he initially sought to make it work. In a July 2014 memo, Nadella told employees the company “will responsibly make the market for Windows Phone, which is our goal” with the acquisition.

It failed. The company took a $7.6 billion writedown on the Nokia deal in July 2015, with a plan for a more focused phone portfolio. Another writedown and more staff cuts followed in 2016.

Speaking at a Salesforce event a few months after the big Nokia markdown in 2015, Nadella did a demonstration using an iPhone.

“It’s a pretty unique iPhone,” he said, according to a Business Insider report. “In fact, I’d like to call it the ‘iPhone Pro’ because it’s got all of the Microsoft software and applications on it.”

By 2017, with Android and iOS having taken firm control of the smartphone market, Microsoft had cut support for Windows Phone 8.1. Joe Belfiore, a vice president at the company, made it clear on Twitter that Microsoft would not be coming out with new Windows Phone features.

A few days later, Nadella made the matter even clearer, telling GeekWire, “the reality is that we cannot compete as a third ecosystem, with no share position, and attract developers.”

Meanwhile, Nadella was busy refining what Microsoft users do on the other big mobile operating systems. His first major appearance as CEO was to announce the launch of Office for iPad. Office support on Android phones and tablets followed within a few months.

Microsoft brought its Edge browser — which debuted in Windows 10 — to Android and iOS, and there’s an Android app launcher from Microsoft. SwiftKey, a popular virtual keyboard app that users can install on Android and iOS devices, was acquired by Microsoft in 2016. Even Microsoft’s classic card games for Windows arrived on the two dominant mobile operating systems.

Far from focusing strictly on organic growth, Nadella has paid up big for acquisitions. Microsoft spent $26.2 billion for LinkedIn in 2016, outbidding Salesforce, and last month snapped up code-sharing service GitHub for $7.5 billion.

Those two deals brought Microsoft large networks of devoted users. They exemplify the goal Nadella laid out for Microsoft in the 2014 memo: “We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.”

The GitHub acquisition also emphasizes the importance Microsoft has placed on popular technologies that it doesn’t need to directly control, said Bob Muglia, a former Microsoft executive who left in 2011 and is now CEO of Snowflake Computing.

“The reality of the world today is modern developers are writing open-source code,” said Muglia. “They’re not writing in proprietary environments.”

By contrast, big acquisitions made under Ballmer were generally meant to to help Microsoft catch up in areas where it was weak, but without a coherent strategy, according to Evercore’s Materne. The two biggest busts were Nokia and ad-tech company aQuantive.

“As a result there was a view that Steve was sort of swinging and missing on all these deals,” Materne said.

In the past year, Nadella has made major moves internally, including a big sales reorganization to focus on cloud and subscriptions, and another organizational shakeup that involved the departure of 21-year veteran Terry Myerson, who was executive vice president of Windows and devices.

Microsoft’s emphasis was evident In the most recent quarter, as businesses including Azure, Office 365 cloud software, LinkedIn and Surface outpaced Windows commercial products.

“The organizational changes Satya did exactly reflected the future of Microsoft as a company,” said Muglia, whose company recently announced a partnership with Microsoft. “This is just, once again, Satya recognizing the new reality that Microsoft is living in and really capitalizing on that.”

In December, Materne and his colleagues issued a note predicting that Microsoft will reach a market cap of $1 trillion by 2020.

In an interview he said, “there’s a general belief that they’re heading in the right direction.”

Source: Tech CNBC
How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years

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