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Why It's Clear That Microsoft Picked the Right CEO

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In the months since Steve Ballmer revealed he would be stepping down as Chief Executive Officer of tech giant Microsoft (NASDAQ: MSFT  ) , a great deal of speculation swirled based on who could be his likely successor. For a while, it seemed Microsoft would choose an outsider, but in the end, the company chose Satya Nadella, who previously held the position of Executive Vice President of its cloud and enterprise group.

For several years, Microsoft struggled to break away from technologies of the past, such as the personal computer. Microsoft is finally seeing strong success in cloud-based services. That's how Microsoft has been able to post strong earnings in recent quarters, and by picking Nadella, that momentum is only set to continue.

Why Satya Nadella is a perfect fit
Satya Nadella becomes the third chief executive officer of Microsoft, and served 22 years with the company in his prior role. Nadella is credited with spear-heading Microsoft's major strategy shift, which includes building Microsoft's massive cloud infrastructure.

Stepping into the position as chief executive means he takes the helm of a company in the midst of a major strategic shift. It's becoming clear that Microsoft is being rejuvenated because of its highly successful cloud product offerings, particularly at the enterprise level where Microsoft dominates.

In all, Microsoft's second-quarter revenue hit a record, at $24.52 billion, which represented a 14% increase. A significant driver of its results was particularly strong performance from its commercial segment. That's because, not only does that segment account for the majority of Microsoft's overall revenue, but it's vastly more profitable than the other segment, devices and consumer.

Within the commercial business, its commercial licensing division generated a massive 92% gross margin in the most recent quarter. Microsoft's cloud-based offerings are performing tremendously. Its commercial cloud services, which include Office 365, Azure, and Dynamics CRM Online, more than doubled quarterly revenue versus the same quarter last year.

Microsoft's future will be shaped by its success in breaking away from the personal computer, which is an industry that seems to be in a significant structural decline. Technology industry research firm IDC estimated that worldwide PC shipments fell 5.6% in the fourth quarter and 10% for 2013.

Large-cap tech in a pinch
The collapse of the personal computer is exactly why Microsoft, as well as a host of other major technology companies, are rushing to break away from the PC. International Business Machines (NYSE: IBM  ) , which used to be a primarily hardware-focused company, is in the process of its own transformation. IBM is trying very hard to become a technology consulting company, particularly in cloud-based services.

This will take time, as IBM is a huge company, but notable progress is being made. IBM's cloud revenue hit $4.4 billion last year, representing a 69% growth rate. Unfortunately, it's still being weighed down by its hardware segment, which saw revenue fall by 26% in the fourth quarter. This caused total revenue to fall 5% in 2013.

Other technology companies are further along than IBM in capitalizing on the cloud, but large technology companies don't turn on a dime. For example, Oracle (NYSE: ORCL  ) booked 2% revenue growth in its fiscal 2014 second quarter, and a clear disparity is emerging in its results. Revenue from hardware systems products fell 3%, but its software revenue increased 5%. New software license and cloud software subscription revenue increased 1% in constant currency, even while facing a tough comparison to last year's 18% growth in the same quarter last year.

Microsoft's future is in the cloud
Microsoft clearly sees the writing on the wall in the technology world, which is that growth going forward is in software and not the PC. Microsoft is quickly working to break away from the personal computer, and its efforts are succeeding. That's why picking Satya Nadella, and his breadth of experience in the company's cloud and enterprise group, is a perfect fit. Take it from Bill Gates, who stated, "During this time of transformation, there is no better person to lead Microsoft than Satya Nadella."

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  • Report this Comment On February 06, 2014, at 1:32 AM, emilykulish wrote:

    I am not sure if Nadella is the perfect match, but clearly it cannot be too wrong. Microsoft does not need any radical changes.

    It just needs to execute faster, compete more aggressively. If Microsoft is willing to price Surface tablets with no profit margin, launch 8″ tablets and price its Windows phone at no profit margin, it will immediately gain 50% of market share and crush Apple, Google and Samsung!

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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