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How Satya Nadella and the Cloud Turned Microsoft Around

By Chris Neiger - Jan 25, 2020 at 12:11PM

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Nadella made a bold prediction for his company and then followed through magnificently.

When Satya Nadella took over as Microsoft's (MSFT -0.23%) CEO in 2014, he predicted that Microsoft's annual cloud revenue would grow three-fold in just two years. Nadella then helped craft a plan for Microsoft to achieve this goal, by focusing the company's attention on its cloud services, ditching its mobile ambitions, and ensuring that many of Microsoft's cloud products would work on former rivals' platforms.

The result was nothing short of phenomenal. Microsoft achieved its cloud computing revenue goal ahead of schedule and the company has become the second-largest cloud infrastructure player behind Amazon.

In this video from our YouTube channel, we take a look at how Nadella -- and the the cloud -- turned Microsoft around over the past six years and how investors have benefited from its massive transformation.

Narrator: Just six years ago, it looked as if Microsoft's best days were behind it. The company was stumbling in the smartphone market, its share price had been nearly stagnant under its longtime CEO Steve Ballmer, and the tech giant had lost most of its innovative edge.

Then, at the beginning of 2014, Satya Nadella took over as Microsoft's CEO and the company began a transformational shift from a slow-moving tech stalwart to a high-growth cloud company that once again has innovation pumping through its lines of code. 

This refresh of the company hasn't gone unnoticed by investors, who have pushed the company's share price up more than 330% since Nadella took over.
 
But how exactly did Nadella turn Microsoft around? Let's take a closer look. 

When Nadella took the reins from Ballmer, the company was just about to close on what became one of its biggest financial mistakes. 

In an effort to take on Apple and Google in the smartphone space, Microsoft spent $7 billion to buy Nokia's struggling Devices and Services business. The idea was that Microsoft could better take on the smartphone duopoly if it was in control of both smartphone hardware and software. 

But, as you probably already know because you don't have a Windows Phone in your pocket… it didn't work and the company essentially took a loss on the entire purchase less than two years after it made the acquisition.

To say that Microsoft had lost its way would be an understatement. Which may be why Nadella wrote this to Microsoft employees on his first day as CEO,  

"While we have seen great success, we are hungry to do more. Our industry does not respect tradition – it only respects innovation.”

To bring back that innovation, Nadella turned Microsoft into one of the most successful cloud computing companies.

In 2015, Nadella made a prediction that his company's annualized commercial cloud revenue would reach $20 billion by the end of the 2018 fiscal year. 

It was a bold statement, considering that Microsoft's cloud business had annualized revenue of just $6.3 billion at the time.

Not only did Microsoft achieve its goal, but it reached it nearly a year earlier than Nadella's estimate.

One of the ways it accomplished this is through its Azure cloud computing product, which is now the No. 2 cloud computing infrastructure service, outpacing even Google, and giving Amazon, which is the No. 1 cloud player, plenty of competition. 

The company doesn't break out Azure revenue, but Nadella said recently that the service is used by 95% of Fortune 500 companies for "mission-critical" workloads.

But Azure is just one part of the company's broader commercial cloud sales, which also includes Office 365 subscriptions and the company's customer relationship services product, called Dynamics 365.  

Commercial cloud revenue accounts for more than one-third of the company's total sales and it's likely that it'll continue growing, in part because the company closed a record number of multi-million dollar commercial cloud agreements in 2019.

Additionally, Microsoft's commercial cloud business has impressive gross margins that reached 65% at the end of fiscal 2019.

It's worth mentioning that Microsoft had already set up many of its cloud computing products before Nadella became CEO, but he's the one that focused the company's attention on the cloud and made it a formidable competitor. 

By nearly all measurements, Microsoft focus on the cloud under Nadella has been a smashing success and has turned the once sluggish tech company into an innovative giant. 

This transition has helped grow the company's valuation under Nadella from about $300 billion to more than $1 trillion right now.

But don't expect Microsoft to begin sitting back and enjoying its current success. Nadella said recently:

"At Microsoft we have this very bad habit of not being able to push ourselves because we just feel very self-satisfied with the success we’ve had…. We’re learning how not to look at the past."

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