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 computing
company that once again had innovation flowing 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. 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 the 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." And 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 that it accomplished is through
its Azure cloud computing product, which is now the No. 2 cloud computing infrastructure service,
outpacing 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,
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-billion-dollar commercial cloud deals 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 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's 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 this current success. Nadella said recently
that "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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