During Microsoft's (NASDAQ:MSFT) recent Worldwide Partner Conference (WPC), COO Kevin Turner emphasized that Windows 10 and the cloud were the keys to its future. Turner declared that Windows 10 would represent a "seminal moment" for the company, thanks to the union of its universal app store, mobile experiences, and new hardware. He also stated that Microsoft had "to own the cloud" by focusing on security and privacy across private, hybrid, and public clouds.

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Source: Microsoft

Neither statement should surprise Microsoft investors, who have been hearing similar statements from CEO Satya Nadella over the past year. But just how successful will this transition be?

The future of Windows 10
In April, Microsoft claimed it would install Windows 10 on 1 billion active devices by fiscal 2018. That sounds like a lot, but it's actually a fairly easy goal to achieve.

According to Microsoft, multiple versions of Windows are currently installed on 1.5 billion PCs worldwide. Research firm Gartner forecasts 951 million new PCs will be shipped worldwide between 2015 and 2017. Based on Windows' current market share of 91%, roughly 865 million new PCs should be sold with Windows 10 preinstalled. If just a small portion of existing Windows 7 and 8/8.1 users take advantage of Microsoft's free upgrade offer for Windows 10, that figure could easily top 1 billion by 2018.

During Microsoft's fourth quarter conference call, Nadella stated that the company's OEM partners had created "over 2,000 distinct devices and configurations" and "hundreds of new hardware designs" for Windows 10. He stated that those new devices could revive the slumping PC market and "return Windows to growth."

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Windows 10. Source: Microsoft

Unlike its predecessors, Windows 10 is a scalable OS that can be used across mobile devices, PCs, and Xbox One consoles. Software like Cortana, Office, Continuum, Edge, and other universal apps can be synchronized across multiple platforms. Xbox One games can also be streamed to Windows 10 devices.

This unity can leverage Microsoft's strength in PCs to expand into mobile devices, its weakest market. Instead of relying solely on Windows license sales, Nadella also intends to monetize the OS "with store, search, and gaming" revenues. Meanwhile, enterprise customers will gain beefier security features and a new management platform for BYOD (bring your own device) policies.

The future of the cloud
Nadella also set a goal of generating $20 billion in annual cloud revenues by fiscal 2018. That goal sounds lofty, but it certainly isn't unrealistic.

Microsoft reported that its total cloud revenues rose 88% year over year last quarter, but that was a slowdown from the triple-digit growth that the business posted in all four previous quarters. But that growth pushed the unit's annual run rate to over $8 billion. Between the fourth quarters of 2014 and 2015, its annual run rate rose over 80%. If the annual run rate continues rising at just 40% per year, it would hit $11.2 billion in 2016, $15.7 billion in 2017, and $22 billion by 2018. That would be equivalent to nearly a quarter of Microsoft's projected revenues for fiscal 2016.

Microsoft's cloud revenues are mainly generated by Office 365, its Salesforce (NYSE:CRM) competitor Dynamics CRM, and its cloud-computing platform Azure, which competes against Amazon's (NASDAQ:AMZN) AWS.

Office 365 currently generates most of that revenue, but Azure has the highest growth potential. Microsoft doesn't disclose exactly how much revenue Azure generates, but Deutsche Bank analysts estimated in April that it generated $500 million to $700 million in annual revenue, making it about one-tenth the size of AWS. But at WPC, Turner claimed consumer use of Azure had more than doubled over the past year.

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Microsoft Azure. Source: Microsoft

But Azure also faces fierce competition in the cloud-computing market from rival platforms like AWS, IBM's (NYSE:IBM) BlueMix, and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) App/Compute Engines. That competition is causing prices to fall across the market, which could throttle Azure's profitability.

The transition continues ...
As Nadella has repeatedly stated, Microsoft is trying to evolve into a mobile-first, cloud-first company. Yet that transition won't be easy, since its foundations are firmly planted in the PC market, and Google is giving away competing operating systems and cloud-based productivity software for free. Nonetheless, Nadella has done an admirable job at sharpening Microsoft's vision for the future -- something that was hopelessly clouded during Steve Ballmer's tenure.

 

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Gartner, Google (A shares), Google (C shares), and Salesforce.com. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.