For most of its 42 year history, Microsoft has based its profits on the Windows and Office cash-cows. Perpetual licenses, special deals with OEMs, licensing agreements with corporate customers and regular paid product upgrades drove the company’s revenue for decades. But today’s Microsoft is a different beast. With significant growth in almost every significant financial measure, Nadella’s Microsoft is recording double digit growth on the back of revenue streams that didn’t exist less than a decade ago.
In their financial report for the first quarter of the current financial year, Microsoft reports
- Revenue was $24.5 billion and increased 12%
- Operating income was $7.7 billion and increased 15%
- Net income was $6.6 billion and increased 16%
- Diluted earnings per share was $0.84 and increased 17%
Cloud-based services such as Office 365, which is an evolution of the traditional office revenue stream, grew significantly. Even everyone’s most annoying social network, LinkedIn pulled in US$1.1B in revenue for the quarter. In total, cloud services contributed over $15B to Microsoft’s revenue. The remaining $9B came from Surface revenue which increased 12% driven by sales of the new Surface Laptop as well as traditional OEM licensing which remained flat.
The change in Microsoft driven by Nadella is palpable. It is reminiscent to the company’s transformation in the 1990s when Bill Gates pivoted the company in a very short time to accept the importance of the Internet as a public network after trying to create a private version with the fist iteration of MSN.
Perhaps the most significant thing Nadella has driven is something not visible on a balance sheet. He has made the company far more platform agnostic and balanced the company’s desire to sell proprietary software in a market where the most used operating systems are no longer versions of Windows. While the company has largely missed the mobility wave through the failure of their mobile devices business, they are well placed to keep us using their software and their new hardware, while perhaps not the biggest sellers, is helping to redefine product categories.