What Satya Said: Notes from Microsoft's Q4 2014 Earnings Conference Call

What Satya Said: Notes from Microsoft's Q4 2014 Earnings Conference Call

Some details in an ocean of talk

On Tuesday, Microsoft announced the results of its fiscal fourth quarter, which ended June 30, 2014: The firm earned a net income of $6.48 billion on revenues of $23.38 billion. We already knew that the software giant was an economic powerhouse. But Microsoft's story in this changing era hinges on a move from traditional software to services and devices. So what did CEO Satya Nadella tell us in the wake of these earnings, and how does this change our perception of how the company is doing?

There were a number of things to look for in this talk. The impact of Nokia and of course the subsequent layoffs, and how Windows Phone is doing. Anything about the next Windows, and the future of Surface. How/whether non-productivity-focused products and services would continue. How well cloud-based solutions like Office 365 and Azure are performing vis-à-vis traditional on-premises products. And so on.

But I was particularly interested in whether Mr. Nadella would say anything substantive. I love the guy, and I think he's right for Microsoft. But he's clearly been given a pass thus far on providing details. There have been a lot of sweeping, high-level statements. But until the surprisingly aggressive decision to layoff fully half of the acquired Nokia employees and 18,500 people overall, we'd never seen any actual implementation from the guy. Just vague pronouncements. A subtle redefinition of "devices and services" into "mobile first, cloud first." That kind of thing.

So what did we get?

Yet another explanation of Microsoft's new focus on productivity in the "mobile first, cloud first" world

"Mobility for us goes beyond just devices, while we are certainly focused on building great phones and tablets, we think of mobility more expansively," he said. "We also see great opportunity in simplifying and managing the user experiences spanning multi-devices ecosystems with our identity management, device management and data security."

"Our mobile and cloud opportunity views and forms our decisions on what to build and where to invest." To this end he (again) described three main areas of investment:

1. Focus on the core productivity experiences and platform investments across the company.

2. Consolidate overlapping efforts. This included "one" Windows and "consolidated dual use productivity services that cross life and work."

3. Run all businesses in an economically sound way.

He didn't say this, but the second and third items there are obviously related to the recent layoffs too.


The concept of dual-use is not new per se, Microsoft and others have been talking about the notion that people are, well, people as well as employees and that they will naturally mix and match these personas on digital devices for years. But by explicitly focusing on this segment, so to speak, Microsoft—and Mr. Nadella—are putting a stake of sorts in the ground.

"These are users who use technology both at work and in their personal life. This is how we reinvent productivity," he said. He noted that OneDrive and OneDrive for Business were now one team. Outlook.com and Exchange are now one team. Skype and Lync. (These are not new changes, by the way.)

When asked about dual-use during a Q&A, Satya Nadella expanded on this a bit.

"When I think about productivity, it doesn't separate out what I use as a tool for communication with my family and what I use to collaborate at work," he said. "So that's why having this one team that thinks about outlook.com as well as Exchange helps us think about those dual use. Same thing with files and OneDrive and OneDrive for business because we want to have the software have the smart about separating out the state carrying about IT control and data protection while me as an end user get to have the experiences that I want. That's how we are thinking about harmonizing those digital life and work experiences."

"How will we monetize? Of course, we will again have a combination, we will have our OEM monetization and some of these new business models are about monetizing on the backend with Bing integration as well as our services attached and that's the reason fundamentally why we have these zero-priced Windows SKUs today."

Support all devices

This is still controversial in some circles, though I've argued that it's time to let go of the past.

"We have a specific goal for multiple Microsoft applications to be available on every home screen. This is why we brought Office to the iPad and now there are more than 35 million downloads, the Word, Excel, PowerPoint and OneNote," he said. Smart. Not new. But smart.

Deliver ambient intelligence that spans applications

This falls into the future of productivity, or what Nadella calls Microsoft's reinvention of productivity. There are some great examples, too: Cortana, which started on Windows Phone but will come to Windows, Xbox and elsewhere. Skype Translation, which is arguably the best technology demonstration of the past ten years. And Delve, which is a "Facebook suite for productivity ... a new breed of intelligent and social work experiences that will turn enterprise search on its head as information that is relevant to you finds you." These are all amazing technologies.


"[This is] how I view Office, the category and how it relates to productivity broadly," he said. "I believe the category that Office is in, which is productivity broadly for people, the group as well as organization is something that we are investing significantly and seeing significant growth in."

"On one end you have new things that we are doing like Cortana. This is for individuals on new form factors like the phones where it's not about anything that application, but an intelligent agent that knows everything about my calendar, everything about my life and tries to help me with my everyday task."

"On the other end, it's something like Delve which is a completely new tool that's taking some – what is enterprise search and making it more like the Facebook news feed where it has a graph of all my artifacts, all my people, all my group and uses that graph to give me relevant information and discover. Same thing with Power Q&A and Power BI, it's a part of Office 365. So we have a pretty expansive view of how we look at Office and what it can do. So that's the growth strategy and now specifically on Office renewals."


Here we go. "In FY14, we saw business customers recommit to Windows," he said. Nice, but it was nicer to see him finally spell out the fact that while "Windows licenses are $0 for any OEM building a device less than 9 inches," the Windows offering with Bing integration was "a low cost" offering for PC makers building other device/PC types, something Mary Jo Foley and I had had to sort of figure out based on Microsoft's previously vague statements.

Responding to a question about Universal Apps, Mr. Nadella said the following.

"One of beauties of Universal Windows app is, it aggregates for the first time for us all of our Windows volume," he noted. "The fact that even what is an app that runs with a mouse and keyboard on the desktop can be in the store and you can have the same app run in the touch-first on a mobile-first way gives developers the entire volume of Windows which is 300 plus million units as opposed to just our 4 percent share of mobile in the U.S. or 10 percent in some countries."

"So that's really the reason why we are actively making sure that Universal Windows apps is available and developers are taking advantage of it, we have great tooling. Because that's the way we are going to be able to create the broadest opportunity to your very point about developers getting an ROI for building to Windows. For that's how I think we will do it in a responsible way."


"We are optimistic given the early sign from the Surface Pro 3's performance in the market." (Not to be a jerk about it, but they said the same thing about Surface 2.)

Windows Phone + Nokia

"We saw a good early start to Lumia 630 and 635 as well as Lumia 930 especially in Europe," he said. "In the year ahead, we are investing in ways that will ensure our device OS and first party hardware aligned to our core."

Responding to a question about Microsoft' growth strategy for Nokia, Mr. Nadella said the following.

"We are very focused on I would say thinking about mobility share across the entire Windows family," he said, alluding to not just phones but also tablets. "We want to think about mobility not just one form factor of a mobile device because I think that's where the ultimate price is."

"But that said, we [have] seen increased volume for Lumia year-over-year, it's coming at the low end in the entry smartphone market and we are pleased with it. It's come in many markets we now have over 10 percent that's the first market I would sort of say that we need to track country-by-country. And the key places where we are going to differentiate is looking at productivity scenarios or the digital work and life scenario that we can light up on our phone in unique ways."

"What we have done with Surface and PPI shows us the way that there is a lot more we can do with phones by broadly thinking about productivity. So this is not about just a Word or Excel on your phone, it is about thinking about Cortana and Office Lens and those kinds of scenarios in compelling ways. And that's what at the end of the day is going to drive our differentiation and higher end Lumia phones."

More alarmingly, someone else from Microsoft noted that the firm hoped to get to "break even" on its Windows Phone hardware business by the end of FY15 (next June) by making "the difficult choices to get the cost base to a place where we can deliver ... and we do assume that we continue to grow our units through the year and into 2016 in order to get [there]."

Windows Server and servers

What about on-prem servers, one questioner asked.

"Overall, we have had a major revamp of our server line-up, SQL 14 being the recent one which we launched in the last quarter," he answered. "And it's the strength of our server products, I mean this is that phenomena where our servers are becoming – are become much more competitive, Windows server for virtualization and private cloud, system center for datacenter management, SQL for all the in-memory work load capabilities it has and BI. All of that has really benefited from us running our own cloud pushing our own servers to run these add scale services. And with that being in place and these refreshers we are seeing increased investment in interest on our infrastructure when it comes to data centers."

In other words, cloud first. Then we'll think about those old-fashioned servers next. Or at least maybe.

"One of the things is as the public cloud is growing; we in fact don't see it. It is for now as a zero sum. In fact, we see growth especially with the virtualization rates because people are not – overall the number of applications on mobile side are growing all of those mobile applications drive backend compute and storage. And that backend compute storage some of it goes into the public cloud, but a lot of it even goes into the datacenter. And that's where we have a very good price performance equation and a TCO equation. And so we are being pretty competitive in grabbing share and Hyper-V share is a good example of that."


"[While] it's important for us to have a core that's thriving, it's equally important to play smart bold bets in other areas where we have the ability to add value and have impact that's what we are doing with Xbox," he noted, explaining the weird exception Microsoft is making for Xbox. "We made the decision to manage Xbox to ... focus on gaming. Gaming is the largest digital live category in a mobile first-cloud first world. It's also the place where our past success a revered brand and passionate fan base present us a special opportunity."

And then there's bad news for Xbox Music and Video.

"With our decision to specifically focus on gaming, we expect to close Xbox entertainment studios and streamline our investments in music and video. We will invest in our core console gaming in Xbox live with a view towards the broader PC and mobile opportunity."

Streamline. That's not a good word.

A more disciplined approach to first party hardware going forward

We're looking at you, Lumia and Surface.

"Going forward all the devices will be created with an explicit purpose to light up our digital work and life experiences," he said. "Good examples of this today are what we are doing with Surface Pro 3 for note taking and PPI for meetings. You can expect to see this type of innovation in our hardware including phones."

But not Xbox, I hope.


A lot of stuff there. Lots to digest.

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