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Why Microsoft Corporation's Deal for Xamarin Is Spot On

By Tim Brugger – Mar 9, 2016 at 10:28AM

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The cloud king’s mobile ambitions just took a major step in the right direction.

CEO Satya Nadella's "mobile-first, cloud-first" mantra is a mainstay at Microsoft's (MSFT 0.07%) Redmond, Wash., headquarters. It seems Microsoft employees, industry pundits, and investors alike have taken to Nadella's two-pronged, strategic approach to move the once PC-reliant behemoth into some of the tech world's fastest-growing markets.

In many respects, Microsoft is making considerable strides to achieve its mobile-first, cloud-first initiatives. Last quarter's nearly $9.5 billion annual run-rate in cloud sales puts Microsoft at, or near, the top of the provider list in a market expected to climb to $204 billion this year.

But as Microsoft bears are quick to point out, its mobile-first pillar hasn't exactly hit the ground running, let alone garnered results anywhere near its cloud efforts. There's more to "mobile first" than meets the eye, though, and Microsoft's most recent acquisition could be just what the doctor ordered to really kick-start Nadella's vision.

Let's make a deal
With over 80% of the smartphone OS market and 60% of the world's tablets running Alphabet's (GOOG 1.56%) (GOOGL 1.90%) Android OS, and a large share of the remaining operating systems loaded with Apple's (AAPL 1.37%) iOS, Microsoft's Windows Phone has a big mountain to climb. One of the primary reasons Microsoft has made little to no headway in mobile OS share is its lack of developers compared to the undisputed leaders.

What developer would opt to build a Windows-compliant app for 2% of the global mobile marketplace when the same amount of work for an Android or iOS device is instantly available to billions of prospective users? The recent acquisition by Microsoft of its longtime partner Xamarin, for an undisclosed sum, will help remedy the problem of too few developers, and it's an ideal fit for Nadella's mobile agenda.

Xamarin is essentially an all-in-one platform for developers. Using Xamarin, developers are able to build a single mobile app that is compatible with Microsoft Windows Phone, as well as mobile devices with Android or iOS -- and it works. Xamarin boasts more than 15,000 customers around the world and is hugely popular with techies; over 1 million app dev-types have utilized its services.

Xamarin's platform is seamlessly integrated with Azure -- Microsoft's popular cloud platform -- thanks to the pair's long-standing partnership. And that crossover between both of Nadella's twin pillars is another example of Microsoft's real mobile-first ambitions: getting its Software-as-a-Service (SaaS), search, and related offerings in front of as many mobile users as possible, regardless of the device's OS.

Image source: Microsoft.

Signs of life
Investors and pundits sometimes count Microsoft's Lumia smartphone and Surface line-up sales to measure its mobile success. Thankfully, it appears more folks are beginning to recognize that, like Alphabet's Android, Microsoft's mobile strategy is to use its OS as a gateway to what it does best: sell SaaS and drive search traffic delivered via the cloud. A look at last quarter's financial results demonstrates that strides in these key areas are being made.

The aforementioned cloud revenue run-rate of almost $9.5 billion got much of the ink when Microsoft announced is latest earnings results on Jan. 28, as did the record-fast adoption of Windows 10 OS for PCs. Already, almost 13% of the world's desktop computers have upgraded to Microsoft's new desktop OS, so the hoopla is warranted.

Last quarter, Office 365's commercial revenue jumped almost 70%, and consumer subscribers increased to 21.6 million from "just" 18.2 million, sequentially. Revenue from Microsoft's Dynamics CRM also climbed more than double digits last quarter. Not all of that growth can be attributed to Microsoft's mobile-first efforts, of course, but getting Windows in front of the mobile masses will help drive future results.

Yet another quarter of more than 20% growth in Bing search revenue is another positive indicator of Microsoft's mobile-first plans. Taking a page from Alphabet's book to use an OS to drive revenue in other areas, particularly from Microsoft's SaaS and cloud product suite, rather than rely on profits from device sales as Apple does, is spot on.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Apple. 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.

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