Microsoft Corporation Is Making All the Right Friends

On April 24 of this year, new Microsoft (NASDAQ: MSFT  )  CEO Satya Nadella hosted his first quarterly earnings call. Fiscal year 2014's third quarter was a sound, if not spectacular, quarter for the new Microsoft chief. Of course, as followers of Microsoft know, Nadella landed smack dab in the middle of one of the software giant's largest undertakings: transitioning to the skyrocketing mobile and cloud computing markets.

Nadella summed up last quarter best when he said, "This quarter's results demonstrate the strength of our business, as well as the opportunities we see in a mobile-first, cloud-first world." The "strength of our business" statement was typical CEO-speak, but what should have Microsoft investors cheering was Nadella's emphasis on its mobile and cloud-first focus. And a couple of moves lately have made it abundantly clear: Microsoft is getting serious in both key markets.

The recent past
It's been a couple of weeks now since Microsoft announced its expanded strategic partnership with German-based cloud leader SAP (NYSE: SAP  ) . It can be difficult measuring exactly who leads the race for global cloud dominance, as so many of the biggest players discuss growth on a percentage basis only and sidestep specific cloud revenue questions. That's not a problem with SAP, and a look at its results in the most recent quarter make it easy to see why.

According to SAP's recently completed first quarter, cloud and related services revenues jumped 60% compared to the prior year, to nearly $300 million. On an annual basis, SAP is on track for just shy of $1.5 billion in cloud revenues. That's not IBM territory, but when combined with the rapid growth Microsoft is enjoying in the cloud, it's certainly significant. Investors seem to be pleased with the enhanced partnership, too, as Microsoft's stock has inched up to nearly $41 a share since the news broke. Microsoft and SAP also plan to build out each of their respective big data tools and services.

The deal with SAP could also give Microsoft a much-needed boost in expanding its mobile presence. Already a part of Microsoft's Windows phone OS, SAP intends to expand its offerings, including allowing customers to build custom apps using Windows phones. As smartphone owners know, the ability to easily develop, download, and use apps can make or break an OS.

Mended fences
It's hard to imagine former Microsoft CEO Steve Ballmer sitting down with (NYSE: CRM  ) head Marc Benioff for any reason, let alone to announce a strategic partnership between the two once-bitter rivals. But in yet another win for Nadella, the two were weren't just in the same room, they were gushing about each other's services late last week as they announced the joining of forces.

The deal doesn't include Salesforce incorporating Microsoft's Azure Infrastructure-as-a-Service (IaaS) yet, but that shouldn't prevent both from recognizing gains from the alliance. For Salesforce, its leading CRM solutions will now be incorporated into Windows phone and desktop devices -- yes, there are still a few out there. And Azure isn't completely out of picture, Benioff said. Salesforce will use the IaaS internally at first, and look for ways to integrate the service into other areas of the company.

For Microsoft, gaining a commitment from the leading CRM provider to further incorporate SQL server solutions and, perhaps even more exciting for Microsoft, expand Salesforce's use of Office 365, are major wins. Microsoft's Office 365 Home already has 4.4 million subscribers -- adding almost a million in the last three months alone -- and the partnership with Salesforce should give it an even bigger boost.

Final Foolish thoughts
Both partnership announcements are going to be potentially huge wins for Microsoft, as well as SAP and Salesforce -- just as strategic alliances should be. But as impressive as the alignments are from a fundamental perspective, they say even more about Nadella and the direction he's leading Microsoft. It hasn't taken long for Nadella to spark change at Microsoft, and if his new friends are any indication, we haven't seen anything yet.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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