Please ensure Javascript is enabled for purposes of website accessibility

Why It's Clear That Microsoft Picked the Right CEO

By Bob Ciura – Feb 5, 2014 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Satya Nadella's years of experience make him the perfect fit to lead Microsoft during its strategic transformation.

In the months since Steve Ballmer revealed he would be stepping down as Chief Executive Officer of tech giant Microsoft (MSFT 0.62%), 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 (IBM -0.42%), 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 (ORCL -0.17%) 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."

Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines, Microsoft, and Oracle.. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

IBM Stock Quote
IBM
IBM
$145.87 (-0.42%) $0.62
Oracle Stock Quote
Oracle
ORCL
$80.71 (-0.17%) $0.14
Microsoft Stock Quote
Microsoft
MSFT
$241.82 (0.62%) $1.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.